5 Small-Cap Buys With Large Potential

by Louis Navellier | December 9, 2011 7:30 am

5 Small-Cap Buys With Large Potential

magnify small caps 5 Small Cap Buys With Large Potential[1]I have to say, I love this time of year. Not just because the holidays are here, but because it’s the seasonally strong time of the year for stocks. Each year at this time we load up our buy list with fundamentally superior stocks and watch them outpace the market in the weeks and months to follow.

Sure, it’s hard to want to put money into the market when you can’t tell if the market is quite finished gyrating. But I’m here to tell you this is the perfect time to buy. You get in while other investors are scratching their heads and steal stocks at bargain prices out from under them.

In that vein, here are five small-cap stocks that have two powerful tailwinds at their back right now: strong sector trends and the seasonally strong period for small caps..

Arabian American Development (NASDAQ:ARSD[2]) is a two-for-one stock. That means it has two great growth drivers in one company. ARSD not only owns and operates a petrochemical facility in southeast Texas, it also owns a significant stake in a mining company in Saudi Arabia:

ARSD makes chemical products from petroleum. It has a 60% North American market share in Styrofoam and similar products used in drinking cups, food packaging and the like. It also uses petroleum to make adhesives and rubber products. 

The company also owns a 37% stake in a Saudi Arabian mining operation for copper, zinc, gold and sliver. The mine is expected to be operational in the coming days, which will provide an excellent boost to earnings in the coming quarters.

In the most recent quarter, Arabian American Development’s sales rose 66.1% to $61.5 million, compared with $37 million in the same quarter a year ago. During the same period, earnings rose 128.6% to $3.9 million — or 16 cents per share compared with $1.7 million, or 7 cents per share a year ago. The analyst community was expecting earnings of 9 cents per share, so Arabian American Development posted a 77.8% earnings surprise. Looking forward, the analyst community is expecting annual fourth-quarter sales growth of 99.2% and 750% annual earnings growth.

In the past month, the analyst community has revised their consensus forecast for earnings by 105.9%. Typically, such aggressive earnings revisions precede future earnings surprises. The stock is a good buy, but is thinly traded, so I must insist that you try to buy the stock with a limit order within 10 cents of the previous day’s closing price. Under no circumstances should you try to buy this stock with a market order, since you could send it soaring and hurt yourself and other investors.

DCP Midstream Partners LP (NYSE:DPM[3]) is a great play on natural gas and propane. The company gathers, compresses, treats, processes, transports, stores and sells natural gas in the U.S. It also does many of these things for propane and natural gas liquids.

It’s a stable business that isn’t too complicated. Bottom line: DCP Midstream is a go-to player in a hot market.

In the third quarter, DCP Midstream posted 29.2% annual sales growth and 687% annual earnings growth of $1.35 per share. The analyst community was expecting earnings of only 27 cents per share, so the company posted a whopping 400% earnings surprise! Looking forward to the fourth quarter, the analyst community is expecting 35.4% annual sales growth and 446.3% annual earnings growth. The company also has a very healthy 5.8% dividend yield that is taxed at a 35% federal rate, since it’s a limited partnership.

Pioneer Drilling (NYSE:PDC[4]) is another great drilling and oil services company that I want you to add to your holdings this month. PDC provides its services to major oil and gas exploration and production companies in Colombia and the U.S. It boasts 71 land drilling rigs, 78 well service rigs, 98 wireline units and an impressive fishing and rental services business (this is part of the oil exploration business, not the kind of fishing you would do on vacation).

In the third quarter, DCP Midstream Partners posted 38.4% annual sales growth and 320% annual earnings growth of 11 cents per share. The analyst community was expecting earnings of 10 cents per share, so the company posted a 10% earnings surprise. Looking forward to the fourth quarter, the analyst community is expecting 34.1% annual sales growth and 362.9% annual earnings growth.

Spectrum Pharmaceuticals (NASDAQ:SPPI[5]) is a pharmaceutical company with a specialty in oncology — the treatment of cancer. The company currently has two cancer treatments on the market, Fusilev, a treatment for advanced colon cancer, and Zevalin, a treatment for a type of lymphoma. Currently, Fusilev sales make up about 86% of total revenues, and Zevalin sales account for the remainder. Interestingly enough, this time last year Zevalin sales accounted for most of Spectrum Pharmaceutical’s business, but in the last 12 months Fusilev sales have exploded over 584%! This is partly because colon cancer is the third most commonly diagnosed cancer and is the third leading cause of cancer death in the U.S.

The success of Fusilev helped fuel record sales growth in the last quarter, which boomed 205% to $51 million — compared with the same quarter last year. Earnings also rocketed 541% from a loss of $4.6 million in Q3 2010 to a gain of $20.3 million in Q3 2011. Adjusted earnings per share weighed in at 34 cents, which trounced the consensus earning estimate of 11 cents per share by 209%! Looking forward to the fourth quarter, the analyst community is expecting 47.3% annual sales growth and 225% annual earnings growth. In the past month, the analyst community has revised their consensus forecasted earnings by 110.8%.

But what really excites me about this company is its pipeline: Spectrum has over 10 drugs in either late stage development or development! This includes Apaziquone, a treatment for bladder cancer; Belinostat, another lymphoma treatment; and Ozarelix, a treatment of prostate cancer. This is a midsize biotechnology company that is about to experience blowout growth. It’s already at the top of the industry in terms of return on equity and revenue growth, and I’m excited to see where this agile company will go in the future.

Susser Holdings (NASDAQ:SUSS[6]) is the first small-cap grocery store I’ve reviewed in some time! But what’s interesting about Susser Holdings is that, although it is classified under the Grocery Stores industry, it also has quite a handhold in the oil industry. The company started over 70 years ago as a family gasoline and convenience store business. Susser’s Petroleum Co., as it was known back then, was actually responsible for the system that allows customers to purchase gas with a credit card from unattended stations!

Several decades and acquisitions later, Susser is responsible for over 510 convenience stores and supplies fuel to 372 dealers and a significant number of other commercial customers. Stripes LLC, Susser’s retail arm, also operates 270 Laredo Taco Company and Country Cookin’ restaurants.

Now, there aren’t too many store chains that have such tremendous growth prospects like Susser’s Stripes — the company plans to add 18-22 new retail units to its network this year. This is because the company has enjoyed tremendous operating results and is looking for a way to put this money to use. In the third quarter, Stripe’s sales rose 40% to $1.35 billion — compared with the same quarter a year ago. During the past four quarters, Susser Holdings’ earnings surged 103.8% to $18.5 million — or $1.06 per share — compared with $8.9 million or 52 cents. The analyst community was expecting earnings of 56 cents per share and $1.32 billion in sales, so the company posted a modest sales surprise and an 89% earnings surprise!

Looking forward to the fourth quarter, the analyst community is expecting 27.3% annual sales growth and 91.7% annual earnings growth. In the past month, the analyst community has revised their consensus forecast for earnings by almost 33%. This makes me very excited to see what kind of earnings surprise the company can pull off in the next quarter. Mix a diversified business model with favorable diesel and gasoline prices, and you have a recipe for success.

Endnotes:
  1. [Image]: http://investorplace.com/wp-content/uploads/2011/04/magnify-small-caps.jpg
  2. ARSD: http://studio-5.financialcontent.com/investplace/quote?Symbol=ARSD
  3. DPM: http://studio-5.financialcontent.com/investplace/quote?Symbol=DPM
  4. PDC: http://studio-5.financialcontent.com/investplace/quote?Symbol=PDC
  5. SPPI: http://studio-5.financialcontent.com/investplace/quote?Symbol=SPPI
  6. SUSS: http://studio-5.financialcontent.com/investplace/quote?Symbol=SUSS

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