5 Small Cap Stocks for 2009

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 |  Includes: CMG, CMG.B, EHTH, GEOY, PRO, ZIXI
by: Chris Fernandez

As we enter 2009, and leave the carnage that was 2008 behind us, I recently wrote that now is a fantastic time to buy shares of companies you have been watching and where the fundamentals present an excellent risk/reward scenario.

A fresh start to the new year gives us all a chance to catch our breath and reexamine the allocation of our portfolios.

Particularly of interest to me and readers of this blog, are which stocks we should be purchasing for the riskiest portion of our portfolio; namely, those devoted to small and micro-cap stocks which I specialize in.

In this report, I will be outlining 5 great stocks for the new year from highest to lowest allocation, and explaining my reasons for liking each company, as well as the biggest risk factors when it comes to investing in that stock.

I’ll also outline at what price I feel these stocks are great values and when you should buy more, or hold off untill a better price comes along.

Finally, I will detail the % of your portfolio specifically set aside for risky stocks, that you should be investing in these companies.

For instance, if you only have $5,000 to invest after maxing out RIA, 401(k) or other retirement savings accounts, etc., how much of your “play” money should be put towards each of these names.

Remember that these selections are only current as of right now, and aren’t all formal recommendations on my site.

For updates on my current model portfolio and the companies recommended in this report, please check back with PeakStocks.com.

OK, enough talk, let’s get right to it!

Recommendation #1: GeoEye Inc. (NASDAQ: GEOY)

GeoEye Logo

New to the GeoEye story?

GeoEye Inc. (NASDAQ: GEOY) is a leading provider of global space-based and aerial imagery and geospatial information.

GeoEye’s imagery is used in a broad array of applications that include: government monitoring and surveillance, intelligence gathering, construction planning, scientific research such as environmental monitoring, and the online mapping industry via Google (NASDAQ: GOOG), Yahoo! (NASDAQ: YHOO), Microsoft (NASDAQ: MSFT) and other partners.

Want more?

  • Read my latest buy recommendation here.
  • OR: listen to my EXCLUSIVE interview with GeoEye’s management team here.
  • OR: Read my latest update on the company’s Q3/2008 earnings release and conference call here.

The main reason you should invest in GeoEye:

Any day now we will be hearing from GeoEye and the National Geospatial-Intelligence Agency (NGA) that GeoEye’s latest satellite imagery being delivered by GeoEye-1 (launched in September), has been certified and accepted for full use by the NGA.

Once this happens, GeoEye will begin to deliver on the promise that has long been delayed along with the launch of GeoEye-1, and begin delivering the sharpest and most accurate imagery available commercially.

This will ratchet up GeoEye’s revenues, margins, profits and fulfill the promise the company has long held.

You can read my last fully detailed buy recommendation here.

Additional reasons that you should invest in GeoEye:

  • Revenues expected to double in 2009, and with it profits and cash flow
  • Recent insider buying (click here to learn more)
  • Recently signed Service Level Agreement (SLA) with NGA will smooth out revenues and increase margins (click here to learn more)
  • Exclusive imagery deals with Google (NASDAQ: GOOG), and overseas vendors expands GeoEye’s reach, income, and service area, thus ensuring that their huge library of images remains in constant demand
  • GeoEye now operates a constellation of 3 satellites: GeoEye-1, IKONOS, and OrbView-2
  • Commercial satellite imagery is a growing field, with increasing demand from the online community and domestic and foreign governments

Biggest risk factors you should know before you invest in GeoEye:

  • Although all but assured, GeoEye-1’s imagery could fail to pass muster with the NGA, not be certified, and never be certified. This would essentially wipe out our investment in the company.
  • Even if the imagery is certified, there is always a risk that any of GeoEye’s satellites, and in particular GeoEye-1, could fail at any time due to malfunctions, loss of orbit, etc.
  • The market for GeoEye’s products could diminish if the NGA (GeoEye’s largest customer) scales back its imagery orders. The same could happen with GeoEye’s other foreign and domestic customers.

Critical Buying Information:

  • Portfolio allocation: 25%
  • Strong Buy: < $18
  • Buy: $18-$26
  • Hold: $26-$32
  • Consider Selling: > $32*

* Before selling, please check PeakStocks.com for the latest updates.

Recommendation #2: Chipotle Mexican Grill, Inc. (NYSE: CMG), (NYSE: CMG.B)

Chipotle LogoNew to the Chipotle story?

Chipotle Mexican Grill (NYSE: CMG), (NYSE: CMG.B) owns and operates over 800 “fast-casual” Mexican restaurants and offers a focused menu of burritos, tacos, burrito bowls (a burrito without the tortilla) and salads made from fresh, high-quality raw ingredients, prepared using classic cooking methods and served in a distinctive atmosphere.

Chipotle adheres to what they call Food With Integrity (FWI), whereby Chipotle seeks better food not only from using fresh ingredients, but ingredients that are sustainably grown and naturally raised with respect for animals, the land, and the farmers who produce the food.

Chipotle’s ultimate goal is to be able to serve only organically raised and grown food in all their restaurants.

Want More?

  • Read my initial recommendation and fully company overview here.

The main reason you should invest in Chipotle:

Chipotle represents one of the best-in-breed players in the oversaturated and crowded restaurant, and particularly, fast-casual dining space.

With their sparse, yet extremely customizable menu, made with all natural ingredients, Chipotle’s food with integrity approach is catching on, and even in this economic climate, Chipotle is still growing sales and opening new locations to the tune of about 15-20% per year.

With a passionate, strong and deep management team, as well as strong same-store sales and cash flow generation, Chipotle represents one of the best, if not the best, plays in the restaurant sector.

This is one of the first sectors to rebound from a slowdown, and we’re already starting to see this with Chipotle.

Quick Note: Please make sure to always purchase the “B” shares: CMG.B as they are EXACTLY the same as the “A” shares: CMG, BUT have 10 times the voting power, AND are usually anywhere from 5-15% cheaper than the “A” shares.

Additional reasons that you should invest in Chipotle:

  • High margins, profit, and cash flow generation
  • Able to fund expansion from their own cash flows, with no debt
  • The average Chipotle location pays for itself in less than 3 years
  • Company announced huge stock buyback for about 10% of the company’s shares. Incidentally, the company is purchasing their “B” shares.
  • As noted above, passionate founder/CEO in for the long haul
  • High insider ownership

Biggest risk factors you should know before you invest in Chipotle:

  • Consumer spending could fall further before it gets better
  • Chipotle’s same-store sales growth has declined over the last year and may continue to do so as a result of these headwinds and higher prices for raw materials
  • Expansion plans could prove too lofty and hurt sales and cash flow down the line
  • Food costs could continue to rise, forcing Chipotle to raise prices further to maintain their competitive edge in terms of high quality organic and natural ingredients
  • Stock price is rarely, if ever “cheap”, even when beaten down

Critical Buying Information (CMG.B shares):

  • Portfolio allocation: 20%
  • Strong Buy: < $45
  • Buy: $45-$65
  • Hold: $65-$80
  • Consider Selling: > $80*

* Before selling, please check PeakStocks.com for the latest updates.

Recommendation #3: eHealth, Inc. (NASDAQ: EHTH)

New to the eHealth story?

eHealth LogoeHealth, Inc. (NASDAQ: EHTH) offers Internet-based insurance agency services to individuals, families, and small businesses primarily in the United States. The company’s e-commerce platform, which is accessed directly via ehealth.com and ehealthinsurance.com, enable individuals and families to research, analyze, compare, and purchase health insurance products online.

For anyone that is self-employed, runs a small business, or as more and more companies stop paying for employee health insurance, needs to purchase their own health insurance, it is becoming increasingly crucial that individuals find affordable health insurance and eHealth gives them the power of choice.

eHealth offers various health insurance products, including medical health insurance coverage, such as preferred provider organization; health maintenance organization and indemnity plans; short-term medical insurance; student health insurance; health savings account eligible health insurance plans; and ancillary products, such as dental, vision, and life insurance.

Because of the fixed-cost nature of health insurance (there is no discounting online or otherwise in this highly regulated industry), eHealth is probably one of the only ways that most individuals will ever see what different health insurance offerings they could purchase from up to 175 different companies.

Want More?

  • Start: with my initial company write-up here.
  • OR: read my last company and earnings update here.

The main reason you should invest in eHealth:

More and more Americans have been losing their jobs at a higher rate, which is predicted to be even higher over the next few quarters.

Intuitively, you would think that this would mean those looking for health insurance would be out of luck, and cut back on all expenses, even one as vital as health insurance, in these difficult times.

In fact the opposite is true.

One of the few things that families will not forgo in times of crisis or job loss, is their health insurance.

They might lower their coverage deductibles or premiums and find a compromise between what they can afford and what coverage they might need in a worst-case scenario, but most will not give up catastrophic health insurance coverage.

eHealth allows those looking for cheaper alternatives to search through over 175 different providers and find the best fit in terms of price, coverage and benefits.

This trend will continue, and when times do get better, eHealth will still offer a cost effective solution to continue to propel sales and growth.

Additional reasons that you should invest in eHealth:

  • Legislation might actually increase eHealth’s value proposition if more Americans are forced to purchase health insurance coverage
  • Company has been authorized by the board to repurchase up to 10% of the company’s shares outstanding
  • Strong, tenured and fully invested management team with large stakes in the business
  • Excellent balance sheet with $143 million in cash and no debt
  • Fantastic margins, cash flow, and free cash flow generation
  • Only small direct competition, no direct large competitor, and large moat
  • Fantastic margins, cash flow, and free cash flow generation

Biggest risk factors you should know before you invest in eHealth:

  • Declining economy might force people to forgo health insurance, regardless of the cost savings through eHealth, as it might be perceived as an unaffordable expense
  • Possible changes in legislation could affect cost structure of eHealth’s offerings as well as the need for health insurance in light of possible legislation for universal health care, etc.
  • Increasing customer acquisition costs could signal a peak in the business model
  • If growth continues to slow, or if eHealth has to spend more for customer acquisitions, so too will eHealth’s valuation and stock price

Critical Buying Information:

  • Portfolio allocation: 20%
  • Strong Buy: < $13
  • Buy: $13-$18
  • Hold: $18-$22
  • Consider Selling: > $23*

* Before selling, please check PeakStocks.com for the latest updates.

Recommendation #4: PROS Holdings, Inc. (NYSE: PROS)

New to the PROS story?

PROS Holdings Logo

PROS Holdings, Inc. (NYSE: PRO) is a leading provider of pricing and revenue optimization software worldwide in five major markets: airline, hotel, cruise, manufacturing and services.

If you’ve ever wondered how hotels, airlines, or other businesses know how to price their offerings to always seem to squeeze the very last dime out of potential customers, PROS is one of the companies responsible by applying revenue optimization software that prices company’s offerings on the fly to maximize revenue.

PROS has proprietary pricing algorithms and systems that have been developed and refined over many years of implementation and experience, that provide the company with a distinct competitive advantage over the many rivals that troll the pricing optimization space.

Want More?

  • Start: with my initial company write-up here.
  • OR: read my sell recommendation of PROS here.

The main reason you should invest in PROS:

PROS Holdings is a riskier play on the turnaround in the economy and with it, the willingness of companies to spend more money in the new year on IT spending and software/hardware to improve their pricing technology and capitalize on the perception that “people don’t have as much money as before.”

Folks are still going to look to go on cruises, take vacations, fly places, etc., and PROS software will be invaluable to these companies to squeeze every last bit of margin and profit that they can in what otherwise is going to be a cutthroat time for consumer-based companies.

I feel that as things settle down and at least flat-line, not even improve as much as stop getting worse, PROS’ technology will be in higher and higher demand since it is a proven technology that is already being used by some of the world’s largest and most well known companies.

Pricing optimization software might not sound sexy, but it will never go out of style, it will just be put on the shelf temporarily if companies pare back IT spending, which they indeed have in the last 6 months or so.

Once things turn, the companies that are left standing and that are in the strongest positions, will use the opening presented by the changing tides to leap ahead of their competition, and one significant way of doing that is to make sure that you are selling your product in the best possible manner for not only your bottom line, but to add value to the customer experience and compete on an even playing field in real time.

Additional reasons that you should invest in PROS:

  • Niche product, high barriers to entry to specific proprietary pricing algorithms, structures and methodologies
  • Insiders have recently begun to purchase large amounts of shares on the open market
  • Company approved up to a $15 million share buyback, which would represent about 8% of the total shares outstanding.
  • High insider ownership: Insiders as a whole own over 40% of PROS’ shares outstanding. Within this group the CEO owns about 6.8%, the CFO 2.3%.
  • Huge stockpile of cash ($48 million, $0 debt)
  • Continued execution by management: 9 straight years of being cash flow positive
  • Steady growth within the industry as well as potential takeover candidate by a larger company

Biggest risk factors you should know before you invest in PROS:

  • Because PROS’ offerings require a significant commitment by their customers both in hardware, software and manpower, shrinking budgets might curtail future orders, regardless of the promise of PROS’ offerings to actually increase company’s profits via its software. In fact this already was showing up in PROS’ latest earnings releases.
  • Increasing competition by new entrants, and old stalwarts like Oracle (NASDAQ: ORCL), SAP (NYSE: SAP) and others
  • Continued deceleration of future bookings and overall slowdown in the marketplace for PROS’ products.
  • PROS’ product offerings could become a commodity or feature-set of current offerings by other companies thus rendering PROS stand-alone versions cumbersome and unattractive

Critical Buying Information:

  • Portfolio allocation: 20%
  • Strong Buy: < $4
  • Buy: $4-$6
  • Hold: $6-$9
  • Consider Selling: > $10*

* Before selling, please check PeakStocks.com for the latest updates.

Recommendation #5: Zix Corporation (NASDAQ: ZIXI)

New to the Zix story?

Zix Corp LogoZIX Corporation (NASDAQ: ZIXI) or ZixCorp (as the company refers to itself) is a leading provider of easy-to-use-and-deploy email encryption and e-prescribing services that connect entities with their customers and partners to protect and deliver sensitive information in the healthcare, finance, insurance and government industries.

ZixCorp’s hosted Email Encryption Service provides an easy and cost-effective way to ensure customer privacy and regulatory compliance for corporate email and its PocketScript® e-prescribing service saves lives and saves money by automating the prescription process between payors, doctors, and pharmacies.

Zix Corp and its largest competitor Allscripts (NASDAQ: MDRX) provide e-prescribing technologies, which have pending legislation in the House and Senate to provide financial incentives to promote the adoption of the technology.

e-prescribing is basically when you go to a doctor and they use a little handheld PDA to enter your prescription information, and then send it off to the pharmacy of your choice without having to write anything out on paper.

This is a quicker and more streamlined way of doing business and has the added affect of catching any potential allergic or drug interactions through the cross-referencing capabilities of the software that is used.

Want More?

  • Start: with my initial company write-up here.

The main reason you should invest in ZixCorp:

Because of the legislative mandates and Zix’s recent announcements with large insurance providers like Aetna (NYSE: AET) in New Jersey and Blue Cross and Blue Shield of Alabama, I believe that we are in the beginning stages of this technology taking off and being accepted at more and more doctor’s offices and that it will become mainstream in no time at all.

The email encryption part of Zix’s business is just another revenue stream that acts as a corollary to their e-prescribing business and right now, accounts for the vast majority of their revenue.

The true future revenue potential of this company, and what one should begin to look at in the years ahead, is their ability to save the American healthcare system tons of money, redundancy and complications that stem from the potential of missed drug interactions, allergies, and other patient-specific problems that would all be logged into the e-prescribing system and allow doctors to run a tighter ship.

With a new administration in tow, it is quite possible that as a matter of health care reform, and cost analysis, future legislation will further pursue the e-prescribing system, and even supplement the cost of it for a certain period of time until it becomes more widespread and is adopted by more doctors.

It is only a matter of time, similar to other technologies that take time to catch on in the stodgy medical profession, before this is commonplace, and all of our prescriptions and medical records too, are zipped away to the proper channels for processing, saving the American taxpayer billions of dollars.

Additional reasons that you should invest in Zixcorp:

  • Company can add features/up-sell to their e-prescribing offerings
  • Improving fundamentals, including positive cash flow has company on the verge of solid profitability
  • Possible merger/takeover target for their IP and applications/customer base

Biggest risk factors you should know before you invest in PROS:

  • Legislation could fall through that requires doctors to begin using e-prescribing services
  • Doctors, notorious for delayed acceptance of new technology, could spurn e-prescribing, or adopt it more slowly than anticipated
  • Zix might not reach critical mass or find enough subsidies for their e-prescribing services to become profitable
  • Although cash flow positive, Zix might need further funding in the future if adoption takes longer than expected and growth stalls, thus diluting shareholders
  • Both the e-prescribing and email encryption services could stall in their growth leaving Zix with scant growth opportunities beyond its core competencies

Critical Buying Information:

  • Portfolio allocation: 15%
  • Strong Buy: < $1
  • Buy: $1-$1.50
  • Hold: $1.50-$2.50
  • Consider Selling: > $2.50*

* Before selling, please check PeakStocks.com for the latest updates.

Bottom Line:

With a portfolio of these 5 stocks allocated as I have intended, bought at the prices that I have specified, you should soundly beat the market over the coming year.