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To create the list below, we began by looking for small cap stocks demonstrating high growth, with 5-year projected EPS growth above 20%. We further screened for those with strong upward momentum, rallying above their 20-day, 50-day and 200-day moving averages (MA).

Next we screened for those with bullish sentiment from institutional investors, with significant net institutional purchases over the last quarter representing at least 5% of share float. This indicates that institutional investors such as hedge fund managers and mutual fund managers expect these companies to outperform into the future.

Our search also looked for stocks showing some degree of optimism from short sellers, with a decrease in share float month over month of at least 1%. This may not seem like much, but it signals expectations of further upside. And in each case the short floats are somewhat high for a rallying stock, making them short squeeze candidates if they continue to rise.

We were left with three companies on our list.

The List

For an interactive version of this chart, click on the image below. Average analyst ratings sourced from Zacks Investment Research.

Do you agree with hedge funds that these stocks will continue to rally? Use this list as a starting point for your own analysis.

1. ADA-ES, Inc. (NASDAQ:ADES): Provides environmental technologies and specialty chemicals to the coal-burning electric power generation industry primarily in the United States.

  • Market cap at $340.23M, most recent closing price at $33.82
  • EPS next 5 years: 50.00%
  • 20 day MA: 18.74%
  • 50 day MA: 29.97%
  • 200 day MA: 55.95%

Compare this rally: The stock returned 29.13% since 4/23/13, better than FTEK and TNC, which returned -3.53% and 7.78%, respectively, during the same holding period.

Net institutional purchases in the current quarter at 1.1M shares, which represents about 12.15% of the company's float of 9.05M shares. Top holders are Wellington Management Company, LLP (10.26%) and Longbow Capital Partners, L.P. (3.30%). Short float: 6.21%.

Shares shorted have decreased from 679.46K to 568.08K over the last month, a decrease which represents about 1.23% of the company's float of 9.05M shares. Days to cover ratio at 7.53 days.

Earnings growth is encouraging:

The company has reported strong earnings growth over the last year, with EPS growing by 54.12%, higher than competitors like Heritage-Crystal Clean, Inc. (NASDAQ:HCCI) (EPS growth over the last year at 29.56%) but still lower than Fuel-Tech, Inc. (NASDAQ:FTEK) (EPS growth over the last year at 247.46%).

ADES has a higher than average projected earnings growth rate over the next 5 years (50.0%). This is higher than Calgon Carbon Corporation (NYSE:CCC) (projected EPS growth over next 5 years at 6.0%) and Tennant Company (NYSE:TNC) (projected EPS growth over next 5 years at 6.0%).

2. Francesca's Holdings Corporation (NASDAQ:FRAN): Operates a chain of retail boutiques in the United States.

  • Market cap at $1.34B, most recent closing price at $30.51
  • EPS next 5 years: 26.50%
  • 20 day MA: 2.04%
  • 50 day MA: 3.27%
  • 200 day MA: 4.29%

Compare the rally: FRAN returned 9.91% since 4/23/13. This performance has eclipsed the likes of URBN but fell just behind ANN which returned 6.82% and 10.95%, respectively, during the same holding period.

Net institutional purchases in the current quarter at 7.0M shares, which represents about 16.63% of the company's float of 42.09M shares. Top holders are FMR, LLC (14.87%) and T. Rowe Price Associates, Inc. (10.04%).

Shares shorted have decreased from 16.01M to 14.14M over the last month, a decrease which represents about 4.44% of the company's float of 42.09M shares. Days to cover ratio at 12.84 days. FRAN's short float stands at 33.42%, which is equivalent to 12.84 days of average trading volume. This is much higher than ANN INC (NYSE:ANN) (short float at 8.36%, representing 3.37 days of trading volume) Ross Stores Inc. (NASDAQ:ROST) (short float at 1.16%, representing 1.07 days of trading volume) and Gap Inc. (NYSE:GPS) (short float at 1.80%, representing 1.22 days of trading volume).

Encouraging Earnings Growth:

The company has reported strong earnings growth over the last year, with EPS growing by 100.47%, higher than competitors Urban Outfitters Inc. (NASDAQ:URBN) (EPS growth over the last year at 36.43%) and ANN (EPS growth over the last year at 28.51%).

FRAN has a higher than average projected earnings growth rate over the next 5 years (26.50%). This is higher than GPS (projected EPS growth over next 5 years at 10.97%) and ROST (projected EPS growth over next 5 years at 12.10%) and URBN (projected EPS growth over next 5 years at 15.32%).

3. Globecomm Systems Inc. (NASDAQ:GCOM): Provides satellite-based communications infrastructure solutions and services.

  • Market cap at $302.85M, most recent closing price at $12.80
  • EPS next 5 years: 21.00%
  • 20 day MA: 1.89%
  • 50 day MA: 4.31%
  • 200 day MA: 8.54%

GCOM returned 4.40% since 4/23/13. This has eclipsed the likes of Juniper Networks, Inc. (NYSE:JNPR) and Palo Alto Networks, Inc. (NYSE:PANW), but have lagged ALU and GD, which returned 9.09% and 14.66%, respectively, during the same holding period.

Net institutional purchases in the current quarter at 1.2M shares, which represents about 6.81% of the company's float of 17.63M shares. Top holders are Wellington Management Company, LLP (9.32%) and Smithwood Advisers LP (6.34%).

Shares shorted have decreased from 1.25M to 1.06M over the last month, a decrease which represents about 1.08% of the company's float of 17.63M shares. Days to cover ratio at 15.68 days. Short float: 5%.

Encouraging Earnings Growth:

The company has reported strong earnings growth over the last year, with EPS growing by 208.21%, higher than major competitors like Cisco Systems, Inc. (EPS growth over the last year at 27.54%) and Alcatel-Lucent, S.A. (NYSE:ALU) (EPS growth over the last year at -422.21%).

GCOM has a higher than average projected earnings growth rate over the next 5 years (21.00%). This is higher than the likes of General Dynamics Corp. (NYSE:GD) (projected EPS growth over next 5 years at 6.35%) and Digi International Inc. (NASDAQ:DGII) (projected EPS growth over next 5 years at 10.00%) but still falls behind ViaSat Inc. (NASDAQ:VSAT) (projected EPS growth over next 5 years at 24.13%).

Also of note:

When comparing valuation ratios to industry averages, Globecomm Systems Inc. looks expensive. The stock's Price / Free Cash Flow ratio stands at 17.29, much higher than Cisco Systems, Inc. (P/FCF ratio at 15.59) and Aruba Networks, Inc. (P/FCF ratio at 11.64).

*Short data sourced from Yahoo! Finance, institutional data sourced from Fidelity, all other data sourced from Finviz.

Source: 3 Rallying, High Growth Small Caps Favored By Hedge Funds