Every once in a while I like to check with the investing gurus to see which small cap stocks they are holding. These are the stocks that have the most room for growth. It is more likely that a company will grow its market cap from $500 million to $5 billion than growing its market cap from $400 billion to $4 trillion. The screen I used at GuruFocus was for stocks with a market cap of less than $1 billion and held by at least 5 gurus (Small Cap Consensus Screen). The screen resulted in five stocks:
Resource America Inc (REXI) is a specialized asset management company that uses industry specific expertise to evaluate, originate, service and manage investment opportunities through its real estate, financial fund management and commercial finance subsidiaries as well as its joint ventures. This has been a slow growth company with revenue increasing at an annual rate of 2.45 percent over the past five years. Earnings per share turned positive in 2012 for the first time since the recession began. The company’s EPS for the last twelve months is 0.32 giving it a P/E of 30.08. Although nothing stands out with the company’s financials, the stock has been up 12 percent over the past year. The stock is held by 7 gurus we follow, but most have been reducing their holdings. Of the gurus we follow, Donald Yacktman is the largest holder with 1.46 million shares, representing 7.16 percent of the shares outstanding.
Market Cap: 199.9 million, P/E: 30.80
Business Predictability: 1/5, Financial Strength: 6/10, Profitability & Growth: 4/10
Mercury Systems Inc (MRCY) provides commercially developed, open sensor and Big Data processing systems, software and services for critical commercial, defense and intelligence applications. Revenue per share has been declining at a rate of 4.47 percent over the past five years. Earnings per share have also been declining and are now negative. The bright spot of the company is that it has no long-term debt and has been able to obtain positive free cash flow. The stock has increased 9 percent over the past year. The price popped in March with talks of the company possibly being sold, but the price came back down after the talks dissipated. The stock is held be 5 gurus we follow with James Barrow of Barrow, Hanley, Mewhinney & Strauss having the largest holding of 2.79 million shares, representing 8.39 percent of the shares outstanding.
Market Cap: 375.5 million, P/E: N/A
Business Predictability: 1/5, Financial Strength: 5/10, Profitability & Growth: 4/10
Faro Technologies Inc (FARO) designs, develops, manufactures, markets and supports portable, software driven, 3-D measurement and imaging systems used in a broad range of manufacturing, industrial, building construction and forensic applications. Their customers include major companies such as General Motors, Boeing, General Electric, Honda, Caterpillar, and Daimler. Revenue per share has been growing at fast rate of 16.6 percent over the past five years, but earnings per share have been relatively flat to down for the past three years. The price of the stock has increased 20 percent over the past year. The stock is held by 6 of the gurus we follow with PRIMECAP Management having the largest position of 1.57 million shares, representing 9.14 percent of the shares outstanding.
Market Cap: 797.1 million, P/E: 36.70
Business Predictability: 1/5, Financial Strength: 9/10, Profitability & Growth: 8/10
Meridian Bioscience Inc (VIVO) is a life science company that develops, manufactures, sells, and distributes diagnostic test kit primarily for gastrointestinal, viral, respiratory, and parasitic infectious diseases. Revenue per share has been increasing at a rate of 6.36 percent over the past five years and earnings per share have been increasing at a similar rate of 4.76 percent. On the plus side, the company also carries no long-term debt. The price of the stock has declined 16 percent over the past year. The stock is held by 7 gurus we follow with Jim Simons of Renaissance Technologies holds the largest position of 531,076 shares, representing 1.28 percent of the shares outstanding.
Market Cap: 832.7 million, P/E: 23.10
Business Predictability: 3/5, Financial Strength: 10/10, Profitability & Growth: 7/10
Bio-Reference Laboratories (BRLI) is a clinical testing laboratory offering testing, information and related services to physician offices, clinics, hospitals, employers and governmental units. It is the fourth largest full-service laboratory in the United States. The company has the best fundamentals of the widely held small caps. Revenue per share has increased at a rate of 18.03 percent over the past five years and earnings per share have increased at a rate of 21.8 percent. The stock dropped nearly 40 percent in December due to the news of slightly lower margins from lower Medicare reimbursements. I was negative about the company after the news, but it has proven me wrong. The company has continued its revenue growth after the large correction and is back on its upward trend. Over the past year, the price of the stock has increased 19 percent. The stock is held by 6 of the gurus we follow with Chase Coleman of Tiger Global Management having the largest position of 720,000 shares, representing 2.6 percent of the shares outstanding.
Market Cap: 852.80 million, P/E: 21.80
Business Predictability: 5/5, Financial Strength: 8/10, Profitability & Growth: 8/10
Small cap stocks are great place to look for the next 10-bagger. But it is not easy. If it was, everyone would be rich. To get an idea of what the knowledgable, investing gurus are looking at, I used the GuruFocus All-In-One Screener to find stocks that are held by the gurus. The same concept can be applied when investigating certain sectors, industries, or even geographical regions you might be interested in investigating. Gaining insight into what the gurus are buying could help lead you in the right direction.