Small-cap stocks offer big-time upside … but only if you pick the right ones. For every three-bagger your buddy brags about unearthing, there are dozens of also-rans that flame out — often spectacularly.
Luckily, our panel of advisers has you covered — they’ve done the legwork for you, and now they’re going to highlight the best of the little guys for you to choose from. Do your own research of course, but these picks are a good place to start.
Read on for best-of-breed small-caps from Jeff Reeves, Louis Navellier, Tom Taulli and Hilary Kramer:
Hooker Furniture Goes on Sale
By Jeff Reeves, Editor, InvestorPlace.com and The Slant
Many investors have never heard of Virginia-based Hooker Furniture (HOFT), which has made furniture since 1924. The goods are middle-market to premium in price point, sold under the Hooker, Envision and Opus brands for use in both homes and offices.
But being under the radar is an asset for Hooker stock, since it’s fundamentals are definitely on the way up. In April, the company reported strong fiscal 2013 results (yes, its FY2013 just ended … don’t ask why) including higher sales and net income that rose 71% compared to fiscal 2012. HOFT also is forecasting its highest earnings and sales in the current fiscal year since the great recession.
But Hooker Furniture stock has lagged the market, up only 7% in 2013 thanks to a huge selloff last week on no news. Why? Well, because this pick is a low-volume issue that trades only 20,000 to 30,000 shares daily. Even a modest order could seriously affect pricing … and it appears sellers dominated the market and skewed pricing for the past two weeks.
Always use a limit order to protect yourself in a thinly traded pick like this, but consider a bargain buy into Hooker while it’s down 15% from highs set in late May. Even if all this stock does is snap back, it will deliver good results. The furniture industry is picking up momentum as the housing market mends, so there is continued chance for upside beyond the already-improving fundamentals.
The company has no debt and $26 million in cash, which is impressive for a company with just a $160 million market cap. Throw in a 2.5% dividend, and Hooker looks mighty hot.
Medical Properties Trust
I often am asked to disclose my single-favorite stock pick. At such times, I always try to remind investors that the best approach is not to hunt for the single-best stock, but to assemble a portfolio of stocks with the very best fundamentals. I am big on diversification and like to have stocks in my portfolio that zig when others zag to help smooth out market gyrations.
So, when I was asked this week to select my favorite small-cap stocks, I was tempted to reply that I like all my stocks equally. However, as well all know, like Mr. Orwell’s famous pigs, some stocks are more equal than others.
My favorite small-cap pick right now is a real estate investment trust. Medical Properties Trust (MPW) is a REIT that acquires, develops and invests in healthcare facilities; leases healthcare facilities out to various healthcare operators and providers; and provides mortgages, working capital and other term loans. Its holdings include general and long-term acute-care hospitals and inpatient rehabilitation hospitals, as well as medical office buildings and wellness centers, and operates a pair of non-owned general acute-care facilities.
As a REIT, the company must distribute at least 90% of its taxable income to its shareholders — for now, that comes out to a 5.1% annual dividend yield.
In the first quarter, Medical Properties announced that its revenues rose 41.4% to $58.4 million, compared to $41.3 million in the same quarter a year ago. During the same period, the company’s earnings rose 125% to $26.2 million, or 18 cents per share, compared to $10.6 million, or 8 cents per share. Medical Properties has also been benefiting from strong insider buying.
The stock was upgraded by Portfolio Grader in November to an “A” and remains a “strong buy.”
Millennial Media: An All-Around Attractive Play
By Tom Taulli, IPO Playbook
Millennial Media (MM) has been a horrible IPO so far. Since launching its offering back in March 2012, shares have plummeted from nearly $28 to a low of $5.87 before rebounding to current levels around $8.
Still, Millennial Media isn’t among the walking dead.
MM operates the No. 2 mobile ad network in the U.S., second only to Google (GOOG) and right ahead of Apple (AAPL). It’s gotten into this kind of league by building a standout platform that makes it easy to implement advertising systems into apps. The technology is available across 7,500 different device types, such as smartphones, tablets and even gaming systems.
Millennial has access to more than 420 million unique users across more than 42,000 apps. With this, the company has built a massive data-set of user profiles, which makes it easier to target ads based on demographics, behaviors and locations.
MM has a roster of blue-chip customers like Bank of America (BAC), IKEA, Nike (NKE), GM (GM) and Coca-Cola (KO). Those companies and others helped to drive strong performance in the most recent quarter, during which revenues surged by 50% to $49.4 million.
True, the company continues to lose money, but there’s hope in the form of a massive market opportunity. According to Gartner research, the mobile ad market is expected to spike from $3.8 billion in 2012 to $13.5 billion in 2015, or a compound annual growth rate of 65%.
In the short-term, Millennial Media is likely to benefit from a few catalysts, such as self-service ads (where MM already is seeing a nice uptake) and the growth of mobile video and the “co-viewing” trend, where people watch TV and tablets at the same time.
As far as the stock is concerned, its losses have translated into a much more reasonable 19 times forward earnings, plus the stock price might have a floor thanks to buyout potential as companies like Microsoft (MSFT) and Yahoo (YHOO) remain desperate to get a piece of the mobile market.
MM has all the elements of an attractive small-cap play. The technology is strong, the market is growing quickly and there is M&A potential — and investors can get a fair deal at current prices.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
Boy, Could Boise Start Booming!
By Hilary Kramer, GameChangers
Operating throughout North America and Europe, Boise’s packaging segment sells linerboard (which creates corrugated board), corrugated containers (used in food and beverage packaging), and other consumer and industrial goods.
Of its two operating segments, Boise’s packaging department is the most leveraged to growing economies and has better long-term prospects. Paper demand is relatively stable, but some segments are in long-term decline as more information is stored electronically. Approximately 55% of the company’s EBITDA (earnings before tax and interest) contribution comes from the paper segment, and 45% comes from the packaging segment.
Management wants to increase its exposure to packaging further, and this initiative is a main catalyst for the stock going forward. The company has already begun efforts to expand, buying two major packaging companies in 2011. These deals helped to expand BZ’s packaging capacity and will aid in management’s goal of growing the segment.
BZ has a strong growth history, and has been profitable in each of its first three full years since becoming an independent public company in 2008 — even earning 22 cents per share on an operational basis in the recession year of 2009, before EPS jumped to 92 cents with the improved economy in 2010. While volume and pricing remained firm in 2011, higher input costs in the paper business caused EPS to decline to 75 cents that year.
With a better economy and greater integration of the packaging division, the company should be able to earn 80 cents a share in 2013. I also really like that the company’s free cash flow is very strong, with depreciation far exceeding capital expenditures in recent years. This strong free cash flow has enabled Boise to fund its acquisitions, pay special dividends, and pare down its debt. BZ is also a lean operator, with adjusted EBITDA margins in excess of 15%. If we ever see GDP rise consistently at a 3% rate for a few years, the company’s efficiency will allow much of the incremental sales fall to the bottom line.
Despite a rally during the past year, the stock still trades at an attractive valuation that does not fully discount the potential earnings improvement from its internal initiatives and a better economy. Any gains in the stock will be enhanced along the way by potential payments of special dividends.
Hilary Kramer holds BZ in her Breakout Stocks Under $10 portfolio.