While the big financials — the big banks in particular — continue to deal with legacy corruption issues and steal all the headlines for Libor scandals, foreign exchange scandals, mortgage scandals and multi-billion dollar fines, small caps largely stay under the radar.
A weaker dollar and rising interest rates are two big tailwinds for small caps, and there are plenty that epitomize the opportunities available to savvy investors.
While many of these small-cap stocks can be found in one of three sectors — insurance, financial markets and real estate investment trusts (REITs), there are some exceptions.
Let’s look at seven small caps that promise big returns in the coming quarters.
7 Small Caps that Promise Big Returns: Universal Insurance Holdings, Inc. (UVE)
The most fundamental thing to understand about insurance companies is that they collect huge piles of cash that clients pay as premiums. They distribute the monies for claims from their clients. The difference is their profit (less operations, taxes, etc, of course).
But insurance companies don’t just sit on their cash — they invest it. This return is a core part of profitability. Bad returns or too many claims to pay out hurt the bottom line.
A weaker dollar and rising interest rates means insurers’ investments will pay off better without the insurer moving up the risk profile to get better returns.
Universal Insurance Holdings, Inc. (NYSE:UVE), is a diversified small cap with operations around the globe. It has recently expanded operations in Brazil and has a presence through various subsidiaries across Europe.
As a U.S.-based firm, rising rates mean better returns, and a strengthening euro will also help profitability in its European operations.
Its affiliation with the legendary Lloyds of London also means it has access to quality clients and good leverage on premium pricing.
7 Small Caps that Promise Big Returns: CNinsure Inc. (ADR) (CISG)
CNinsure Inc. (NASDAQ:CISG) has a very unique niche among small caps — it sells property and casualty and life insurance in China. It also does some work in the auto insurance business.
As China’s middle class (and upper class) grows, insurance is going to be a booming industry as people acquire real estate and more valuable goods that need to be insured.
CISG operates in 28 provinces, including the major cities of Beijing, Shanghai, Guangzhou and Shenzhen.
7 Small Caps that Promise Big Returns: INTL FCStone Inc (INTL)
In the financial sector you simply have companies that make money working with organizations that are looking to maximize their profits.
Companies of all sizes have been sitting on huge piles of cash, as have many banks, brokerage firms, hedge funds and mutual fund companies.
What’s more, these companies are really in demand when the markets go through some sort of major transition. We’re seeing that now with oil prices, bonds and currencies. This is when specialists are in big demand — and you can find plenty of those in small caps.
INTL FCStone Inc (NASDAQ:INTL) specializes in working with mid-sized commercial clients to help them maximize their trading and investing. Instead of having an in-house division manage the corporate coffers, companies hire INTL to do it for them.
INTL leans more towards derivatives (for hedging positions) and commodities trading but it’s a one-stop shop that can do it all. And it’s gaining some serious attention: the stock is up almost 100% in the past six months.
7 Small Caps that Promise Big Returns: Investment Technology Group (ITG)
Do you remember the stir of Michael Lewis’ book Flash Boys, regarding high-frequency trading? And do you remember how Washington and Wall Street were shocked by what was going on and talked about changes and reforms and reintroducing fairness and transparency into the system?
Nice words. But the reality is, high-frequency trading is alive and well, as are dark pools where big trading firms unload big chunks of stocks anonymously and get eaten in varying pieces by other unknown entities.
And that’s not a bad thing. HFT and dark pools are new technologies that serve a purpose. As long as they aren’t abused, and they are focused on gaming the system and helping markets operate more efficiently.
Investment Technology Group (NYSE:ITG) is a major HFT firm. But it’s also more than that. It offers a variety of proprietary research, analysis and trading services for its global client base. That makes it an interesting small-cap stock to buy.
7 Small Caps that Promise Big Returns: Universal Health Realty Income Trust (UHT)
It may be counter-intuitive to think of REITs as a good option in an environment of rising rates, but it isn’t REITs’ ability to buy properties that is the issue. The real issue is if REITs have the right customer base that can sustain increased leasing fees on the properties they use.
This is what makes our next two small caps so special — they are focused on two strong sectors.
Universal Health Realty Income Trust (NYSE:UHT) owns more than 60 properties in 18 states. This small-cap stock company specializes in acute care hospitals, medical office buildings, rehabilitation hospitals, behavioral healthcare facilities, sub-acute care facilities and childcare centers.
These types of facilities are in growing demand as the healthcare system decentralizes from major care facilities, such as hospitals. And these businesses are generally more price elastic than retail stores, since healthcare payers are insurance companies, governments and consumers — the costs are spread out.
UHT also throws off a nice 5.2% dividend, which is certainly a bonus for a stock with this much growth potential.
7 Small Caps that Promise Big Returns: CoreSite Realty Corp (COR)
The other REIT on our list of small cap stocks is CoreSite Realty Corp (NYSE:COR). This is a geek REIT — COR leases data centers.
What does that mean? Well, if you have an online business and don’t want to pay the same price to store your computer servers that you pay to house your employees, you look for a data center.
Computers need special care — temperature, humidity and security are all crucial aspects of having reliable access to online information. And the more online society gets, the more need there is for companies to find storage solutions.
Some have gone to the Cloud, but that usually means giving your information over to another company to manage it. Some people still aren’t comfortable giving their proprietary data for someone else to manage, so they use data centers.
But the bottom line is, data centers are very important and will continue to be important to commerce; whether it’s physician’s office, a small bank or an online retailer. And again, given the importance of what is on those servers, pricing is not a big issue – security and reliability are far more important.
More than 800 of the world’s leading enterprises, network operators, cloud providers, and supporting service providers are already COR clients.
And the 3.5% dividend is a nice kicker for what is fundamentally a tech stock play.
7 Small Caps that Promise Big Returns: Lendingtree Inc (TREE)
Lendingtree Inc (TREE) is unique to the bunch because it has differentiated itself so much that it doesn’t really fit into any of the other categories.
It is, at its essence, an online mortgage broker’s broker. But it has recently taken its model of letting lenders compete for homebuyers to the lending and automobile sectors as well.
Now you can shop for an unsecured loan or a car loan on TREE’s site and it grabs a commission off of the sale. This has great advantages since TREE works in the financial sector without having to deal with all of the red tape.
The stock is up almost 140% in the past 12 months and it will continue its growth as more and more people “shop” their loans and mortgages online as opposed to taking a deal offered by the local bank.
Louis Navellier is a renowned growth investor. He is the editor of five investing newsletters: Blue Chip Growth, Emerging Growth, Ultimate Growth, Family Trust and Platinum Growth. His most popular service, Blue Chip Growth, has a track record of beating the market 3:1 over the last 14 years. He uses a combination of quantitative and fundamental analysis to identify market-beating stocks. Mr. Navellier has made his proven formula accessible to investors via his free, online stock rating tool, PortfolioGrader.com. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.