The Case for Small-Cap Stocks: 4 Reasons to Buy Now
Small-cap stocks are a GREAT place to start if you’re serious about rebuilding your wealth and securing your financial future.
But what makes small-cap stocks so spectacular?
Reason #1: Small-cap stocks always make the turn out of recession the quickest. They’re already lean and mean, so every new contract fattens the bottom line.
Reason #2: The bear market stripped analysts from small stocks — hardly anyone is covering them anymore. This creates wonderful pricing anomalies and gives the individual investor a significant edge.
Reason #3: Earnings are a big no-show among the big blue chips this season. It’s not just the Big 3 automakers — it’s Cisco and Microsoft, too. Yesterday’s innovators have become today’s 3%-per-year-if-you’re-lucky stocks. Meanwhile, innovative small-cap stocks sport earnings two, five, 10 times higher than the blue chips can manage.
Reason #4: Innovation hasn’t vanished in America. In the last two years, a new generation of visionary leaders and brilliant rule-breakers has quietly emerged. They have very little in common with the dot.com con artists of the late ’90s. Indeed, today’s breed of globalinnovators reminds me most of the hard-nosed entrepreneurs who founded companies in the early ’80s. Innovation hasn’t vanished but, just like in the early ’80s, investors aren’t fully aware of these companies. That’s your opportunity.
Here are five of the best small-cap stocks to buy now.
Small-Cap Stock #1: Almost Family (AFAM)
Almost Family (AFAM) is in the home health nursing service business and offers senior
citizens in nine states an alternative to spending their days in nursing homes. As the aging Baby Boomer generation looks to keep a level of independence without sacrificing their level of care, Almost Family is a perfect fit.
The company announced a 124% jump in first-quarter profit thanks to an increase in new business and the strong performance of some newly acquired operations.
Almost Family has been buying up local providers to grow its share of the highly fragmented market and increase its margins. Clearly, this strategy is working, as the company’s earnings rose 55% to 68 cents per share, compared with 44 cents per share in the first quarter of 2008. What’s more, AFAM’s revenue increased by a whopping 77% to $69.2 million from $39 million. Analysts on average were expecting earnings of 60 cents a share on revenue of 63 million, so Almost Family posted a 13.3% earnings surprise and a 9.8% sales surprise.
This stock has rebounded dramatically after a rough start to 2009 when I first recommended it. But this company’s quarterly performance shows it has the potential to run up 20% to 30% in a few days time and is still a great buy.
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Small-Cap Stock #2: Neutral Tandem (TNDM)
Neutral Tandem
(TNDM) provides third-party interconnection services to competitive
telecommunications carriers. In a nutshell, TNDM helps wire-line, wireless and broadband customers talk to each other — even if they all pay their bills to different companies. Neutral Tandem offers services in more than 60 U.S. metropolitan markets and is a critical part of our nation’s communications network. The company’s customers include Sprint Nextel, Comcast Cable and AT&T.
Neutral Tandemearned $9 million or 27 cents per share in the first quarter, compared with $4 million or 12 cents per share in the year-ago period. TNDM’s earnings beat estimates by four cents for a 17.4% earnings surprise, sending shares up 15.6% in just the week following the announcement!
Revenue also rose for the quarter, up 45.8% to $38.2 million due to higher traffic over its network and expansion into new markets. As a result, Neutral Tandem raised its full-year revenue outlook. The company now expects 2009 revenue of $158 million to $165 million, up from its prior forecast of $151 million to $158 million. Shares rallied after the announcement, pushing our total return in this stock up to a jaw dropping 53.8%. This stock has earned a place in my Top 10 for a reason.
Small-Cap Stock #3: MasTec (MTZ)
MasTec (MTZ) plays a vital role in literally supporting the backbone of the U.S.
economy: infrastructure.
For the last 75 years, MasTechas designed, built, installed, maintained and upgraded the telecommunications and utilities infrastructures of the U.S. This company has a hand in everything from telephone lines and high-speed Internet, to satellite and cable television services, to electric, water and natural gas utilities. All you have to do is look outside your window at the nearest telephone pole or glance across the fence at a neighbor’s satellite dish to see where MTZ makes its money!
MasTec recently posted first-quarter earnings of $11.9 million or 16 cents per share, beating estimates by a penny. This 53% rise in quarterly profit was helped by a boost in revenue, which rose to $342.1 million due to the company’s cost containment measures. Shares were down 7% after the earnings announcement because MasTec issued second-quarter and full-year guidance below what Wall Street was looking for.
I’m not concerned, though — looking forward, it’s more than likely that MasTec’s guidance is on the conservative side. As President Obama’s stimulus money filters through the economy, I expect this stock will benefit from the increase in infrastructure spending.
I rate MasTec a very strong buy.
Small-Cap Stock #4:
Ebix (EBIX)
Ebix (EBIX) sells insurance industry software products and services in Asia,
Australia, Europe and North America. This company is not your standard IT firm, however. The company’s Ebix.com website acts as an online auction house for auto, home, health, life and other types of insurance — and Ebix gets a fee on each transaction. It’s cutting-edge applications like this that make Ebix an industry leader.
And the numbers prove it.
Ebix reported its best-ever net income and revenue for the first quarter of 2009. EBIX reported earnings of $8.34 million or 69 cents per share, which is 47% higher than last year’s earnings of 47 cents per share. Total revenue rose from $16.64 million to a 33-year high of $20.67 million during the quarter. The company’s expenses grew by 17%, but I want to also point out that Ebix’s operating margins grew to 40%. Remember, operating margins growth shows that a company is demanding higher prices from its products while keeping sales down — a great sign of efficiency and strong demand. This shows Ebix is becoming a dominant player in its industry since it’s able to grow profit at a higher rate than its expenses.
Looking ahead, I expect Ebix will continue to play an important role on our Buy List, especially as the U.S. dollar weakens. The greenback was about 30% stronger during the first quarter of 2009 compared with the first quarter of 2008, and that took a bite out of Ebix’s sales since this company does a lot of its business abroad. A weaker dollar going forward will help to prop up Ebix’s revenues and income.
Small-Cap Stock #5: Thoratec (THOR)
Thoratec Corporation (THOR), known for its ventricular assist devices (VADs) for patients suffering late-stage heart failure, recently bought Australia’s HeartWare. Investors responded positively to this
move because it brings new technology to Thoratec and expands the company’s already significant market share.
THOR currently has 85% of the U.S. heart pump market and 65% of Europe’s, and this new technology could ensure THOR stays on the top of this market for at least the next five to 10 years. The Thoratec-HeartWare partnership has the potential to grow into a multibillion-dollar business, which will translate to big sales and earnings growth.
After reporting earnings last week, the company said that strong sales at its cardiovascular division drove revenue up 39% over last year to $89.6 million, and earnings rose to $5.6 million or 22 cents per share, compared with a net loss of $678,000 or one cent per share in the first quarter of 2008. Analysts were expecting earnings of 16 cents per share on revenue of $82.9 million, so Thoratec posted a 37.5% earnings surprise and a 7.5% sales surprise.
Thoratec has great fundamentals and is a phenomenal buy.
