by Tom Taulli | December 18, 2013 10:35 am
It’s been a sizzling year so far, with the Dow Jones Industrial Average boasting a gain north of 21%. But the action has not just been with big-time stocks like Boeing (BA), Visa (V), Microsoft (MSFT) and Johnson & Johnson (JNJ).
Instead, small cap stocks have also been big winners in 2013. Just look at a small cap ETF like the iShares Russell 2000 (IWM). It has posted a gain of 32% year-to-date.
Plus, folks who handpicked the right individual small cap stocks could have made even more impressive gains. That’s because lots of small caps stocks put the market-beating gains of the small cap ETF to shame.
Of course, it’s difficult to define the term small cap stocks. So when sorting through and finding the top performers, I focused on companies with a market capitalization between $100 million to $500 million. I also looked at only those companies listed on either the NYSE or NASDAQ.
Take a look at the hottest small cap stocks of 2013:
YTD Return: 317%
Daqo New Energy (DQ) is a leader in the world of small caps stocks. DQ (no, not Dairy Queen) is a company that sells polysilicon — which is key for solar installations — to the Chinese market. No doubt, business has ramped up in the past couple quarters. For example, in Q3 the orders were 29% above guidance.
Something else: For contracts snagged in September, Daqo New Energy filled up 70% of capacity for its Xinjian facilities. Given this, the small cap is investing in expanding its production facilities.
But DQ also has also been able to achieve positive operating cash flows, which has traditionally been tough for solar operators. Although, net losses continue to remain at hefty levels. For the year so far, they have added up to $212.8 million. Still, DQ stock is still one of the best small caps so far in 2013.
Best Small Cap Stocks of 2013 – Liberator Medical (LBMH)
YTD Return: 463%
It seems like whenever I watch a cable news channel, I’ll see a commercial from the next company on our list of small cap stocks: Liberator Medical (LBMH). And apparently, the marketing is working.
This small cap is a federally licensed, national direct-to-consumer provider of medical supplies, with a focus on seniors who are eligible for Medicare. The products are usually bought on an ongoing basis, which provides for stable LBMH revenues.
In the latest quarter, sales increased by 17% to $17.5 million and net income came to $2 million, up from $676,000 in the same period a year ago. The small cap also spent about $2 million on advertising, which was down from $3.5 million in the same period a year ago.
As a sign of confidence, LBMH stock even announced a dividend — hardly a staple of small cap stocks. The yield is roughly 3%.
YTD Return: 504%
Next on our list of small cap stocks is Corporate Resource Services (CRRS). And CRRS is an amalgam of businesses. At the core, there are staffing and recruiting services. But the small cap also has set of cloud-based software offerings. For the most part, CRRS is the result of a myriad of acquisitions over the years.
However, it has been tough to manage. So during the past year, CEO John Messina has put in place strict cost controls and has focused on higher-margin businesses. This has helped boost CRRS stock big-time. Well, and it also helps that the job market has been getting better.
For 2013, the financial results have been solid for the small cap. Revenues jumped by 25% and adjusted EBITDA increased by $11.1 million. Plus, Corporate Resource Services could be one of the best small caps stocks in 2014.
See, CRRS has a software platform has also been a huge success in the UK. And for 2014, the company is rolling it out in the U.S. market. According to COO Mark Levine: the “software revolutionizes the way companies can recruit for open job vacancies.”
YTD Return: 965%
Zhone (ZHNE) has been mostly dead money since the financial crisis, but became one of the hottest small cap stocks about halfway through the year. Yes, in July, small cap ZHNE stock went into orbit.
Zhone, which develops networking solutions, has been investing heavily in its product line and it is starting to pay off. The technologies help with key areas like social media and mobile — which should see long-term growth — and have meant big-time gains for ZHNE stock investors.
For the past consecutive four quarters, the small cap has been able to not only exceed revenue estimates, but also to post positive net income and free cash flows. Keep in mind that ZHNE, like lots of small cap stocks, has been a perennial money loser.
Now, though, it looks like the small cap is committed to being disciplined, while also finding ways to keep up the growth ramp. In fact, despite the fact that ZHNE is one of the top small caps stocks, the valuation still looks reasonable. The forward price-to-earnings ratio is 19X.
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.
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