3 Small Cap Stocks That Can Double Over The Next Year

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Includes: MITK, OCZ, PGR, QLTY
by: Stan Piland

Small cap investors will no doubt be glad to see 2011 fade into history. As we enter the final stretch, the Russell 2000 is down almost 15% year to date. But even that miserable performance does not describe the carnage, as many small companies are down much more even as their fundamental performance has been excellent. Over time however, the winning formula for investing is to buy companies that can grow their earnings when they’re cheap. And in that sense the recent weakness provides a number of excellent opportunities. Listed below are three small-cap companies which are growing sales and profits and whose valuations can expand in a challenging economy.

OCZ Technology (NASDAQ:OCZ) designs, manufactures and sells solid state drives (SSD) for consumer and enterprise data storage markets. In my opinion, the SSD market reached an important inflection point in its growth trajectory in 2011 largely because of the dramatic performance improvements and cost savings achieved by OCZ’s MLC-NAND based drives, and SSDs are expected to rapidly take share from traditional hard drives for the foreseeable future. My detailed description of the investment case for OCZ can be accessed here.

Since my initial article, OCZ has continued to introduce new products, they have beaten estimates and raised guidance each quarter, and product reviews have continued to be quite positive. An SSD Review September comparison between OCZ’s Z-Drive R4 C PCIe and Fusion-IO’s IODrive Duo overwhelmingly favored the Z-Drive R4 and can be obtained here.

My revenue forecasts for (Feb) Fiscal 2012, 2012 and 2014 are $355 mil, $487 mil and $560 mil. Non-GAAP EPS should grow from $0.14 in F12 to $0.69 in F13 and $0.87 in F13. With its software-centric business model, competitor Fusion-IO typically trades at 12-14 times EV/Revenue on 2012 estimates. I think OCZ should be worth at least 2.0-2.5 times EV/Revs on Calendar 2012 revenues of $465 mil, or 30X Calendar2012 earnings of $0.58, which puts my target at around $20. Given OCZ's excellent execution and products, this stock is so stupid-cheap I can barely believe it.

Quality Distribution (NASDAQ:QLTY) operates the North America’s largest bulk chemical transportation network and is the largest provider of Intermodal tank container and depot services. My detailed description of the investment case for QLTY appears here, and the company has met or exceeded earnings forecasts each quarter since my original article. However there have been important developments during the past year which make the QLTY story even more compelling.

1. In 2011, the company entered the energy markets by signing a multiyear contract with a major energy company to provide logistics of their fresh and disposal water hauling needs in the Marcellus Shale. This business has ramped up faster and more profitably than initially expected, and the company now has over 100 units serving several customers in the Marcellus, Eagle Ford, and Bakken Shales. The energy business is expected to continue to ramp quickly, and operating margins are likely to be higher than the company average. I think this is a gigantic, unappreciated business opportunity for QLTY.

2. Additionally QLTY has continued to improve its balance sheet by repaying its expensive 11.75% PIK debt, refinancing its ABL facility and extending maturities on remaining debt to 2017 and 2018.

3. Finally, QLTY extended its Intermodal footprint to the important Virginia, South Carolina, Maryland ports with the recent acquisition of Greensville Transport Company in a transaction which should be accretive within the first year.

My revenue estimates for 2011, 2012 and 2013 are $753 mil, $831 mil and $885 mil, which should enable the company to generate earnings of $0.70, $1.00 and $1.22 respectively. My 12-18 month target is $18 and equates to 18X 2012 and 15X 2013 earnings respectively.

Mitek Systems, Inc (NASDAQ:MITK) develops, sells and services mobile imaging applications and intelligent imaging software, and is a play on the convergence of smart-phones and financial services. The company’s flagship Mobile Deposit enables the user to deposit a check by taking a picture with a smart-phone, and has been adopted by 7 of the top 10 banks in the U.S. Although sales and profits were slightly below expectations in the most recent quarter, the catalysts for higher share prices were bolstered by new customer additions and new product announcements.

MITK’s remote deposit capture (RDC) product, Mobile Deposit, has rapidly emerged as the leader in the RDC field with an estimated 12-24 month lead over competitive products. In the most recent quarter, management announced that new client signings had more than doubled to 181 client banks and financial institutions. The roster of clients is impressive and includes such noteworthy institutions as Fidelity, Paypal, Charles Schwab and Capital One. As of the end of last quarter, 35 clients had deployed Mobile Deposit, compared with 26 at the end of the previous quarter. But most important, anecdotal evidence suggests a rapid ramp in end-user adoption. Schwab has indicated that mobile deposit had jumped from zero to 40% of all check deposits in just six months.

The company recently introduced two new products, Mobile Photo Bill Pay and Mobile Balance Transfer. It indicated that an unnamed Tier-1 bank would launch Mobile Bill Pay in the near future. In addition it was announced MITK had signed Progressive (NYSE:PGR) as a customer for its new Mobile Imaging Cloud service Platform, representing the first penetration into the Insurance vertical.

MITK stock is down 40% in the past month as 4Q revenues and profits were shy of expectations. But I expect it to recover fairly quickly, suggesting the dip is an opportunity to initiate or add to positions. With a September Fiscal Year, Fiscal 2011 was reported as a $.01 profit on $10.3 mil in sales. For F2012 and F2013, I expect revenues of $31.0mil and $55.0 mil respectively. Earnings should be $.032 and $0.54 for F2012 and F2013 respectively. My Calendar 2011, 2012 and 2013 estimates are $.06, $0.35 and at least $0.55. My target is 30X C2013 estimates, or $16.50 within 12-18 months.

Disclosure: I am long OCZ, QLTY and MITK, and I may buy more in the next 72 hours.