3 Small-Caps With Big Futures

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK ( Zenpenny) -- Over the past few months I have mentioned a number of names that I thought would present opportunity for profit to investors over an intermediate to long-term time horizon. What I've rarely done is to pass on opportunities in my favorite area for investment: micro- and small-cap stocks. I go one step further in my research of these names and look for companies that are undergoing some type of distressed situation that forces old habits to disappear, being replaced by new ways of doing things that tends to bring out the value in a much more timely manner.

Investors have a tendency to get caught in value traps more often than not. You will look at a company that seems reasonably priced based on any number of metrics and think to yourself that a 100% gain will be a simple goal over the next 12 to 24 months. What ends up happening is the stock is passed over multiple generations as your great grandchildren await the day when the promise of value becomes a reality. Sure, I am exaggerating a bit. But you get my point.

What investors overlook more often than not are catalysts. Every investment needs a catalyst to realize its value. It doesn't matter if it seems like the cheapest stock in the history of our universe, if a catalyst doesn't exist to extract the juice from the lemon, then it will sit around doing absolutely nothing.

I have come up with three names that not only provide value, but have the catalysts necessary to see that value become a reality. The catalysts come in the form of new economic realities, a restructured balance sheet/management team or a macro trend that will favor the company going forward.

MAMS

MAMS Software Group ( MAMS) is a U.K.-based company that provides software to automotive parts distributors, service companies and manufacturers. They have a dominant position in their marketplace with a controlling share of the current market. Among their current customers in the U.S. you have: Autozone, NAPA Auto Parts, Monro Muffler Brake, Fountain Tire and US Autoforce.

Most of the company's revenue comes from their UK operations, however. The U.S. side of the business has become more of a focus for the company over the past 12 months and should add to the company's top and bottom line in the coming years.

MAMS was spun off from its parent company in 2008 during the peak of the financial crisis. Due to the timing of the spinoff it was not just ignored, but completely buried under a torrent of negativity.

Since the spinoff, the company has essentially gone nowhere. This is despite a complete overhaul of management, debt structure and strategic objectives. The management team has taken great strides to reduce the company's debt and increase cash flow. They had a successful rights offering in 2010 that was oversubscribed, allowing the company to pay off debt. Cash flow has been steadily increasing and is projected to continue ramping up as the company moves forward.

From an economic perspective, the company is positioned in the right sector as individuals are increasingly prone to holding onto their cars until the wheels fall off. This is due to the current state of the economy in the U.S. and U.K., where unemployment and underemployment show little signs of dissipation. This causes an increase in automobile maintenance costs to the benefit of companies like MAMS.

The company is 40% owned by insiders. It has a very tight float. And on a technical basis is under heavy accumulation over the past several months.

CPSS

Consumer Portfolio Services ( CPSS) is a company that is involved with subprime borrowers in the automotive industry. As with anything and everything having to do with subprime, the company was almost lost in the financial crisis of 2008. Their access to capital to make the loans needed for them to generate revenue froze up and the company nearly went up in smoke.

CPSS deals with consumers who do not have the credit worthiness to purchase automobiles. These consumers require a borrower who is willing to take on the risk of default in exchange for a higher interest rate. CPSS fills that need.

There are no lack of customers for CPSS given the current state of economy. Consumer credit ratings have been dropping steadily over the past few years as increasing bankruptcies and foreclosures become a reality for consumers. This has caused many previously desirable borrowers to turn into subprime borrowers who require companies like CPSS to facilitate their next automobile purchase.

The company has been steadily increasing their access to credit facilities, which allow them to make the loans they need to grow revenues. Their most recent credit facility for $100 million was secured in March, allowing the company to make loans on that money with a fairly substantial spread between the cost of borrowing and the cost at which they lend to subprime borrowers.

A key strategic partner that had previously sold all of his shares prior to the financial crisis recently initiated a position in CPSS after being out for a number of years. Arthur Levine of Levine Leichtman Capital Partners bought roughly $1 million dollars worth of the stock in December of 2010. Mr. Levine can be viewed as an activist partner in CPSS due to his previous involvement in the company, serving on the board of directors and providing capital to the company through notes.

CPSS is still being priced as if we are in the midst of a banking crisis. Price-to-free-cash-flow here is less than 1 times the current price.

ANFC

Ante5 (ANFC) is a company that was spun off from its parent company Voyager Oil and Gas (VOG) in July of 2010. ANFC participates in oil/gas exploration in the much-heralded Bakken/Three Forks Shale in North Dakota.

Micro-sized oil/gas companies such as ANFC are speculations on the price of land first and the production of oil or gas second. What will drive companies like ANFC's stock price to atmospheric levels is a frenzy over the land in the Bakken region as more companies become willing to pay higher prices for the land in that area.

This land bubble will be a long-term process and will be 100% dependent on the price of oil. If oil prices were to remain stagnant or begin falling, land prices in oil-producing regions would decline in value, as well. If, however, a scenario that sees oil prices move up dramatically over the next few years takes place, companies like ANFC will see prices for the land they own explode, causing a surge in the stock price.

The CEO of the company believes strongly in the company as he has been buying millions of dollars worth of shares since the stock was spun off from VOG. The company had an oversubscribed private placement some months ago at $1 per share.

They currently own roughly 14,000 acres of land in the Bakken/Three Forks. Plans are to increase acreage exposure, raise additional resources for further exploration and eventually list on a major U.S. exchange. The value of this company will come with its increasing land exposure and oil production capabilities.

ANFC is easily the most speculative stock of the bunch. At the same time, should we see a scenario that witnesses oil prices move up to new highs (a real possibility given various long-term macro catalysts) ANFC could create gains that make even the most aggressive investors blush.

Ali Meshkati is founder of Zenpenny.com, a Web site focused on investing in restructurings and special situations in micro-cap and small-cap stocks. Prior to Zenpenny, he managed Trillian Capital Partners LP, a top-ranked macro hedge fund. He has been trading the financial markets since 1994, working as an adviser to both individual clients, as well as an institutional trader with Bank of America. He can be reached at meshkati78@gmail.com.

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