Three Microcap Value Stocks Worth Consideration

If you are anything like me, you've probably spent many hours screening through list after list of stock tickers trying to unearth some as yet undiscovered companies that, just maybe, might turn out to be the next Google (GOOG), Microsoft (MSFT) or Wal-Mart (WMT). This inevitably results in a collection of speculative smallcap and microcap stocks that you have never heard of before - after all, you're unlikely to find potential multibaggers among the highly researched megacap companies of the Dow Jones - companies that have already grown massively.

There are a number of things that must be considered when looking to invest in these smaller companies, not least of which is that there is often a lot less information available upon which to base your decisions, not to mention volatility and liquidity issues. So where is a good place to start? I personally like to begin my search by looking for value stocks with little or no debt that operate in niche markets. I also like to look for companies with good cash flow, high insider ownership, and a history of growth. It is a common misconception that most smaller companies will inevitably end up being run out of business by a larger one. In fact, many large companies are so slow moving that the smaller company eventually catches or even surpasses them! For instance, there was a time when the majority of people believed that Microsoft was invincible, until little Apple (AAPL) turned the tables and became a multi billion dollar enterprise.

So here are a three companies that I believe are worth considering further, along with a basic overview of each.:

Image Sensing Systems, Inc. (ISNS)
Market Cap: $35.6M
The company develops and markets video image processing products for use in traffic applications, such as intersection control, highway, bridge and tunnel traffic management and traffic data collection. Its family of products, marketed as Autoscope and RTMS, provides end users with the tools needed to optimize traffic flow, enhance driver safety, regulate air quality and address security/surveillance concerns. Image Sensing Systems trades at a P/E of 8.6 and a price/book of 1.25 with a current ratio of 8.96. The company has been steadily increasing earnings and sales, and boasts a return on equity of 15.8%. The company has global exposure and wide potential with sales across North America as well as in Europe, Asia, and the Middle East. The stock currently trades at $8.92 and I would be looking for a 12-month price target of around $14-15.

RF Industries, Ltd. (RFIL)
Market Cap: $12.1M
The company is a provider of interconnect products and systems for radio frequency (RF) communications products and wireless digital transmission systems. Through six divisions the company supplies customers across a wide range of industries including aerospace, medicine, multi-media, and communications, as well as the military. RF Industries trades at a P/E of 9.4 and a price/book of 0.78 with a current ratio of 16.4. The company has demonstrated excellent profitability in the past, however has been affected by the economic downturn, resulting in reduced sales. As a result the company recently suspended its dividend payment in order to focus on product development and acquisitions. The company has a return on equity of 10.1% and the management appear to be making all the right moves to navigate through these difficult times. The stock currently trades at $3.95 and I would be looking for a 12-month price target of around $6-7.

Continucare Corporation (CNU)
Market Cap: $142.5M
Continucare is a provider of primary care physician services in Florida. The company through its network of 18 medical centers provides primary care medical services on an outpatient basis. It also provides practice management services to independent physician affiliates (IPAs) at 25 medical offices. The company trades at a P/E of 11.3 and a price/book of 1.34 with a current ratio of 4.8. The company has demonstrated good EPS and sales growth in recent years and has a return on equity of 12.8% with very high insider ownership. The stock currently trades at $2.40 and I would be looking for a 12-month price target of around $3.50.

Disclosure: At the time of writing the author did not hold shares in any of the companies mentioned in this article.

Comments

[sticktoitiv...:]

Its nice to see another nanocap investor who likes low debt and high current ratios.
Do I have it right that Image Sensing Systems sells to municipalities? Are you worried about their client base? Lower consumer spending means lower sells tax revenue and don't even get me started on property taxes.

Jun 07 04:06 AM

[pftittl:]

I concur, but I wonder why you're not long in any of these if they are such good prospects. I also fear declining tax revenues in state and city budgets impacting the traffic control technology.

Jun 07 09:53 AM

[Wisdom vs. ...:]

1. one implication is automobile growth in BRIC is exponential, so foreign municipalities will be forced to buy this equipment (just guessing here). 2. what i know for FACT is that the US federal stimulus includes 100s of millions of dollars for equipment like this in order to make traffic flow more efficient; so, forget tax receipts, this type equipment WILL be bought (but, I have no idea which company).
thanks for the article

Jun 07 02:58 PM

[Greg Parker:]

Wisdom vs. information makes two very good points here. It would appear from the most recent quarterly filing that Image Sensing Solutions gets around 25% of their revenue from direct sales within the US, around 25% from direct sales outside of the US, and the remainder as royalties from licensing their technology. The Autoscope product line is licensed to Econolite, an industry leader in traffic management systems, a partnership resulting in over 50,000 cameras deployed in over 55 countries and most North American cities. I believe that it is quite likely that Econolite would benefit from the federal stimulus, which indirectly would benefit ISS through increased royalties.

Jun 07 03:50 PM

[sticktoitiv...:]

"I believe that it is quite likely that Econolite would benefit from the federal stimulus, which indirectly would benefit ISS through increased royalties."

Fair enough, I just like to nitpick.

Jun 07 09:33 PM

[inSearchOfV...:]

From what I have read about RFIL it seems to be a conservatively run company. Cash per share of $2.269 with a stock price of $3.95, not bad. It has zero to no long term debt and has enough cash and cash equivalents to fund future growth and or acquisitions. This is an interesting stock at this price. I have a tiny bit of position in this company.

Jun 08 09:04 AM

[Wisdom vs. ...:]

i like both, bought a little RFIL. (ISNS up 10% today, oops). All telcos are going to need to upgrade wireless networks to keep up with smartphones; RFIL should show some positive results by the end of the year

Jun 09 02:45 PM