There are good reasons to include small cap stocks as part of a diversified portfolio. Most importantly, small caps have outperformed large caps as a group for much of the market's history all the way back to the 1920's, and for 13 consecutive years (and counting) since 1999. Furthermore, it is easier for small cap companies to grow revenues, they are often acquisition bait for larger firms (at inflated prices), and most of the market's 1,000%+ gainers start as small cap companies.
1) Under $1 billion market capitalization. (small cap)
2) Grew revenues at 15% or above in most recent quarter, without a one-time non-recurring revenue boost. (growth)
3) Carry an earnings yield of 10% or above, well over the market's 7% average. (value)
4) Have zero debt. (lower business risk)
1) Montage Technology Group (MONT, Financial) - 39% growth, 18.9% earnings yield
Montage develops high-performance, low-power semiconductor solutions for set-top boxes (91% of sales) and LRDIMM memory solutions for cloud computing applications. Montage supplies 9 of the 10 largest set-top box manufacturers in China, has delivered excellent revenue and profit growth, and has seen its stock soar almost 70% since its IPO back in early October. Here is a good overview of the company and its prospects.
2) FutureFuel (FF, Financial) - 37% growth, 14.8% earnings yield
FutureFuel manufactures biofuels (about 60% of revenues) and specialty, custom-made chemical products (about 40%). Much of the growth in biofuels has been due to a reinstated fuel blenders' credit and continued support of the government mandate on renewable fuel. Specialty chemicals are fairly stable and are growing more modestly (8-10%). FutureFuel's, eh, future depends greatly on the government maintaining its support of biofuels, something that is in question right now.
3) RF Industries (RFIL, Financial) - 31% growth, 10.7% earnings yield
RF Industries makes cabling products. Virtually all of its recent success has been due to the Optiflexproduct, a hybrid fiber optic and power cable used by wireless providers to build out their 4G/LTE networks. The specialty medical cables division (for ECGs, EEGs, etc.) has also been performing well. While Optiflex will likely see competition in the future, if RFIL can leverage their relationships with the big wireless companies into new product categories, the firm could continue to grow.
4) Collector's Universe (CLCT, Financial) - 26% growth, 9.7% earnings yield
Collector's Universe provides authentication and grading services for rare and modern coins, trading cards, and autographed memorabilia. The company has a lot of attractive qualities - it is highly niche and its grade marks are industry standards, both competitive advantages. The firm also pays a strong 8.3% dividend yield. The coin market has its ups and downs, and is currently in one of the former, although Collector's move into Asia has paid off as well. The stock is up over 40% in the past year, but still does not look expensive.
5) Lindsay Corp (LNN, Financial) - 16% growth, 12.5% earnings yield
Lindsay Corp makes mechanized irrigation systems for farming. There are a lot of things to like here - mechanized systems continue to gain market share in the U.S., the international opportunity is almost completely un-penetrated, and Lindsay is currently just one of two major providers (with Valmont (VMI)). Emerging economies bring increased food and meat demand, which leads to increased framing activity, which in turn creates demand for Lindsay's systems. For a deep dive on the company, check out thisoutstanding research. At a downright cheap 12.5% earnings yield, you get this story at a bargain valuation as well.
Small Cap Value and Growth, With Low Risk
These are all wonderful aspects, but it would be nice to tip the scales in our favor even further by limiting our small cap picks to companies that are growing revenues, trading at below-market valuations on an earnings yield basis, and carry no debt. Using our screener tool, I've located 5 stocks that meet these criteria:1) Under $1 billion market capitalization. (small cap)
2) Grew revenues at 15% or above in most recent quarter, without a one-time non-recurring revenue boost. (growth)
3) Carry an earnings yield of 10% or above, well over the market's 7% average. (value)
4) Have zero debt. (lower business risk)
List of Stocks
Here are the matches and some brief comments on each:1) Montage Technology Group (MONT, Financial) - 39% growth, 18.9% earnings yield
Montage develops high-performance, low-power semiconductor solutions for set-top boxes (91% of sales) and LRDIMM memory solutions for cloud computing applications. Montage supplies 9 of the 10 largest set-top box manufacturers in China, has delivered excellent revenue and profit growth, and has seen its stock soar almost 70% since its IPO back in early October. Here is a good overview of the company and its prospects.
2) FutureFuel (FF, Financial) - 37% growth, 14.8% earnings yield
FutureFuel manufactures biofuels (about 60% of revenues) and specialty, custom-made chemical products (about 40%). Much of the growth in biofuels has been due to a reinstated fuel blenders' credit and continued support of the government mandate on renewable fuel. Specialty chemicals are fairly stable and are growing more modestly (8-10%). FutureFuel's, eh, future depends greatly on the government maintaining its support of biofuels, something that is in question right now.
3) RF Industries (RFIL, Financial) - 31% growth, 10.7% earnings yield
RF Industries makes cabling products. Virtually all of its recent success has been due to the Optiflexproduct, a hybrid fiber optic and power cable used by wireless providers to build out their 4G/LTE networks. The specialty medical cables division (for ECGs, EEGs, etc.) has also been performing well. While Optiflex will likely see competition in the future, if RFIL can leverage their relationships with the big wireless companies into new product categories, the firm could continue to grow.
4) Collector's Universe (CLCT, Financial) - 26% growth, 9.7% earnings yield
Collector's Universe provides authentication and grading services for rare and modern coins, trading cards, and autographed memorabilia. The company has a lot of attractive qualities - it is highly niche and its grade marks are industry standards, both competitive advantages. The firm also pays a strong 8.3% dividend yield. The coin market has its ups and downs, and is currently in one of the former, although Collector's move into Asia has paid off as well. The stock is up over 40% in the past year, but still does not look expensive.
5) Lindsay Corp (LNN, Financial) - 16% growth, 12.5% earnings yield
Lindsay Corp makes mechanized irrigation systems for farming. There are a lot of things to like here - mechanized systems continue to gain market share in the U.S., the international opportunity is almost completely un-penetrated, and Lindsay is currently just one of two major providers (with Valmont (VMI)). Emerging economies bring increased food and meat demand, which leads to increased framing activity, which in turn creates demand for Lindsay's systems. For a deep dive on the company, check out thisoutstanding research. At a downright cheap 12.5% earnings yield, you get this story at a bargain valuation as well.
