Great Opportunities with Small Caps
This advice may surprise you, as smaller-cap names often have a reputation of being riskier. A 50-cent drop in a $30 stock is only a 1.6% decline, but that same drop in a $5 stock is 11%. The upside, however, is that it works both ways: When the market bounces, low-priced stocks are often heartily rewarded. And since institutions would rather be out touting bigger companies, low-priced stocks are a great way for us individual investors to get a leg up.
Finally, M&A activity is heating up in the second half of the year. This means that corporations sitting on record levels of cash will use it to scoop up smaller companies. When they do, we profit.
All of these factors add up to an exciting time for some lucrative opportunities! So how can you take advantage? By investing in low-priced stocks of solid companies that have strong catalysts to move them forward, even in a slow environment.
One name that I like is Casual Male Retail Group (NASDAQ:CMRG). This men’s retailer had a solid second quarter that was boosted by better-than-expected earnings and a strong performance from its primary catalyst: The Destination XL larger-format stores, which combines the company’s three different price points and is still in its infancy, so the potential here is very exciting. With easy sales comparisons in place for the rest of the year, I believe estimates of 2.5 cents for the current year are realistic, and that number should grow as DXL continues to be rolled out. The company’s debt-free balance sheet also adds to the attraction of the stock, which is trading at bargain prices.
Another attractive stock right now is air pollution control services provider CECO Environmental (NASDAQ:CECE), which recently announced it is seeing increased demand from both new and existing customers, and that global demand is improving. I found this news very encouraging since it should help the company continue to report strong results even if the economic environment remains volatile. The company also has a strong balance sheet, with a net cash position of 71 cents a share. Along with the earnings visibility, CECE is a solid pick for the quarter.
The bottom line is that while the market is in a period of uncertainty, we don’t have to be. Small cap stocks are a great opportunity to invest in names that are well positioned to pop as we close out the year.