Dynamite Comes In Small Packages: 10 Small Caps For Explosive Returns

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Includes: AIRM, AMS, ATHM, ECHO, HIBB, ICLR, MCD, PAG, SAVE, SNCR, SWFT, THRM
by: Chuck Carnevale

Summary

10 undervalued small-cap opportunities for high total return.

The major advantage and disadvantage of investing in small caps.

Not all small caps are the same, choose wisely.

Introduction

Investing in small-cap stocks is not for everyone. My definition of small-cap is a company whose market is $5 billion or less. However, for those brave souls that are willing to assume a little more risk, they can, under the right conditions, be a very profitable choice. Nevertheless, and in the general sense, small caps offer both advantages and disadvantages that I believe should be clearly understood before utilizing this asset class.

There was a time when I invested heavily in fast-growing small- and mid-cap companies. As I have matured (aged), I have significantly curtailed my small- and mid-cap investments. However, I still dabble a bit, because although riskier, the right small- or mid-cap investment can produce outsized rewards. Therefore, and at the request of a few regular readers of mine, I offer this brief introduction into small-cap investing.

The Major Advantage of Investing in Small Caps

On the positive side, there is a theoretical mathematical advantage to investing in smaller enterprises. A small company operating in a growth industry can often grow much more easily and faster than its larger counterparts. Here is where the law of large numbers comes into play. In theory, it is easier for a $1 billion company to grow into a $2 billion company than it would be for a $100 billion company to grow into a $200 billion company.

The history of McDonald's (NYSE:MCD) is a case in point. In 1954, multi-mixer salesman (milkshake machines) Ray Kroc called on a San Bernardino, California restaurant run by Dick and Mac McDonald. Impressed by their operation, Ray pitched his vision of creating McDonald restaurants all over the United States. Although I cannot precisely verify it for sure, I believe there were only four McDonald's restaurants when Ray eventually purchased the exclusive rights to the McDonald's name.

But assuming that I'm reasonably correct, it's easy to understand that growing from four restaurants to eight restaurants (doubling in size) was an easily-achievable task. In other words, early growth of a successful restaurant operation was relatively easy. However, today McDonald's has over 36,000 restaurants. Therefore, it is also easy to understand that going from 36,000 restaurants to 72,000 restaurants (doubling in size) would be an almost impossible achievement. When high-growth is the objective, small size is a great advantage, and perhaps the greatest allure for investing in small caps.

The Major Disadvantage of Investing in Small Caps

On the other hand, small size can also be a great disadvantage. Smaller companies generally do not possess the financial strength and/or flexibility that their larger counterparts do. Consequently, they are often faced with capital restraints that can inhibit their ability to maximize their growth. Additionally, being small can also jeopardize their survival in a weak economy or market.

Furthermore, from the perspective of a passive shareholder, liquidity can also be a problem. Small caps typically have fewer shares trading, which often causes both liquidity and higher volatility issues. And, in the same context, smaller companies rarely pay a dividend because they generally need to keep and reinvest all or the majority of their available capital in order to fund future growth. For these reasons, and many more, small companies are clearly riskier investments than large blue-chip enterprises.

Not All Small Caps Are the Same

What I have written thus far about small caps has been very general in nature. However, as I have often written in the past, generalities do not universally apply. Consequently, I contend that the only thing that small caps truly have in common is smaller size. Just as it is with their larger counterparts, there are many more differences between individual small companies than there are similarities.

For example, not all small companies are growing. In fact, some small caps have become small because their businesses are shrinking. Therefore, investing in small caps should be no different than investing in larger companies. In other words, the same prudent investing rules apply. When investing in small caps, comprehensive research and due diligence becomes even of greater importance. Furthermore, when looking for a small-cap investment, selectivity is crucial. The central idea is to find the very best small company you can, with attractive growth prospects that is also available at a sound valuation.

10 Interesting Small-Cap Research Candidates

In preparation for this article, I started by screening the S&P 600 small-cap index looking for small-cap growth stocks trading at fair - or better yet - attractive value. In addition to growth and value, I was also looking for quality and operating consistency. Because of the risk of investing in small caps, I also put special emphasis and consideration on debt. Utilizing my premium subscription to F.A.S.T. Graphs™, I literally conducted an earnings and price correlated review of all 600 constituents in the index. Much to my surprise, I found very few small caps that I was willing to present as attractive-looking candidates for further research.

However, I was able to come up with 10 rather intriguing-looking small companies that were also attractive from a valuation perspective. On the other hand, the fact that I was only able to find a few small caps that even appeared attractive should be carefully noted. In other words, I didn't find a lot of value in quality small-caps today.

Nevertheless, I offer the following 10 small-cap research candidates listed in alphabetical order. The portfolio review lists them by ticker, name, sector, debt to capital, P/E ratio, price to cash flow, dividend yield, market cap, near-term estimated earnings per share growth and longer-term trend line estimated EPS growth.

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Since many readers may not be familiar with each of these small-cap selections, I offer the following overview of each of the 10 research candidates. Courtesy of S&P Capital IQ, I included a short business description on each, followed by a few slide excerpts from each company's corporate presentations and a link to the full presentation. Additionally, I have provided earnings and price correlated historical F.A.S.T. Graphs™ on each with a calculated return forecast out to 2017 based on what I considered the most appropriate valuation reference line.

Note: I have moved the return calculation pop-up to the left corner of the graph so that it did not cover up important data listed in the FAST FACTS.

Air Methods Corp. (NASDAQ:AIRM)

"Air Methods Corporation, together with its subsidiaries, provides air medical emergency transport services and systems in the United States. The company operates in the Air Medical Services ((NYSEMKT:AMS)), Tourism, and United Rotorcraft (UR) segments.

The AMS segment provides air medical transportation services to the general population as an independent service, as well as to hospitals and other institutions under exclusive operating agreements. Its services include medical care, aircraft operation and maintenance, dispatch and communications, and medical billing and collections. As of December 31, 2015, this segment's aircraft fleet consisted of 321 company-owned aircraft and 92 leased aircraft, as well as 54 aircraft owned by AMS customers and operated by the company under contracts with them.

The Tourism segment provides aerial tours and charter flights, primarily focusing on Grand Canyon and Hawaiian Island tours. This segment markets its tours through Websites, as well as through various agencies, such as online booking companies, hotels, resorts, and cruise operators. It operates 65 helicopters and 2 fixed wing aircraft under three Part 135 Air Carrier Certificates.

The UR segment designs, manufactures, installs, and certifies aircraft modular medical interiors, multi-mission interiors, and other aerospace and medical transport products for domestic and international customers. This segment also offers quality assurance and certification services.

Air Methods Corporation was founded in 1982 and is headquartered in Englewood, Colorado."

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Here is a link to the full presentation.

Click to enlarge Autohome, Inc. (NYSE:ATHM)

"Autohome Inc. operates as an online destination for automobile consumers in the People's Republic of China. The company, through its Websites, autohome.com.cn and che168.com, delivers comprehensive, independent, and interactive content to automobile buyers and owners, including professionally produced content that comprises automobile-related articles and reviews, pricing trends in various markets, and photos and video clips; automobile library, which includes a range of specifications covering performance levels, dimensions, powertrains, vehicle bodies, interiors, safety, entertainment systems, and other unique features, as well as manufacturers' suggested retail prices; new and used automobile listings, and promotional information; and user forums and user generated content.

Autohome Inc. also offers advertising services for automakers and dealers; dealer subscription services that allow dealers to market their inventory and services through its Websites; used automobile listings services, which allow used automobile dealers and individuals to market their automobiles for sale on its Websites; and automobile dealer subscription services that enable dealers to establish and maintain online showrooms of automobiles with pricing and promotional information on autohome.com.cn.

In addition, it operates Autohome Mall, an online transaction platform that facilitates direct vehicle sales and commission-based services; provides iOS- and Android-based applications to allow its users to access its content; and offers technical and consulting services.

The company was formerly known as Sequel Limited and changed its name to Autohome Inc. in October 2011. The company was founded in 2008 and is headquartered in Beijing, the People's Republic of China. Autohome Inc. is a subsidiary of Telstra Holdings Pty Ltd."

Note: This is a Chinese company headquartered in Beijing that trades on the New York Stock Exchange as American depository receipts (ADRs). Consequently, its website is presented in Chinese, and therefore, I was not able to find or present any company presentations. Moreover, I think it's only fair to disclose that I would not be personally inclined to invest in this particular ADR. However, its reported earnings growth has been impressive and its valuation appears intriguing. Therefore, I leave it up to the reader to decide whether it's worthy of further scrutiny or not.

Click to enlarge Echo Global Logistics, Inc. (NASDAQ:ECHO)

Echo Global Logistics, Inc. provides technology-enabled transportation and supply chain management solutions in the United States. It uses a proprietary technology platform to compile and analyze data from its multi-modal network of transportation providers for the transportation and logistics needs.

The company offers services in various transportation modes, such as truckload, less-than truckload, small parcel, inter-modal, domestic air, and international. Its principal transportation management and logistics services include rate negotiation; procurement of transportation; shipment execution and tracking; carrier management, selection, reporting, and compliance; executive dashboard presentations and detailed shipment reports; freight bill audit and payment; claims processing and service refund management; design and management of inbound client freight programs; individually configured Web portals and self-service data warehouses; enterprise resource planning integration with transactional shipment data; and integration of shipping applications into client e-commerce sites, as well as back-end reports customized to the internal reporting needs of the business.

The company serves clients operating in various industries, such as manufacturing, construction, food and beverage, consumer products, and retail. Echo Global Logistics, Inc. was founded in 2005 and is headquartered in Chicago, Illinois.

Third-Party Logistics (3PL)

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Here is a link to the full presentation.

Click to enlarge Hibbett Sports, Inc. (NASDAQ:HIBB)

Hibbett Sports, Inc., together with its subsidiaries, operates athletic specialty stores in small and mid-sized markets primarily in the South, Southwest, Mid-Atlantic, and the Midwest regions of the United States. Its stores offer a range of merchandise, including athletic footwear, team sports equipment, athletic and fashion apparel, and related accessories.

The company also sells merchandise directly to educational institutions and youth associations. As of January 30, 2016, it operated 1,024 Hibbett Sports stores and 20 Sports Additions athletic shoe stores.

The company was founded in 1945 and is based in Birmingham, Alabama.

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Here is a link to the full presentation, to the right of the page, click on "Q3 2016 Hibbett Roadshow Presentation."

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ICON Public Limited Company (NASDAQ:ICLR)

ICON Public Limited Company, a contract research organization, provides outsourced development services to the pharmaceutical, biotechnology, and medical device industries in Ireland, rest of Europe, the United States, and internationally.

It specializes in the strategic development, management, and analysis of programs that support various stages of the clinical development process from compound selection to Phase I-IV clinical studies. The company's clinical development services include product development planning, strategic consulting, study protocol preparation, clinical pharmacology, pharmacokinetic and pharmacodynamic analysis, clinical research center, investigator recruitment, study monitoring and data collection, case report form preparation, statistical analysis, patient safety monitoring, risk-based monitoring, clinical data management, strategic analysis and data operation, regulatory consulting, and medical reporting and pharmacovigilance services.

Its clinical development services also comprise interactive response technologies, electronic endpoint adjudication, medical imaging, adaptive trial design and execution, medical device trial, functional and strategic resourcing, sample analyses, safety testing, microbiology, custom flow cytometry, biomarker development, bioanalysis, immunoassay development, patient registries, outcomes research, health economics, market access and commercialization, price consulting, and healthcare and scientific communication services, as well as electronic transmission of test results, and electronic patient reported outcomes.

ICON Public Limited Company was founded in 1990 and is headquartered in Dublin, Ireland.

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Here is a link to the full presentation.

Click to enlarge Penske Automotive Group, Inc. (NYSE:PAG)

Penske Automotive Group, Inc. operates as a transportation services company. The company operates through three segments: Retail Automotive, Retail Commercial Truck, and Other.

It operates retail automotive and commercial vehicle dealerships principally in the United States and Western Europe; and distributes commercial vehicles, diesel engines, gas engines, power systems, and related parts and services primarily in Australia and New Zealand.

The company engages in the sale of new and used motor vehicles; and related products and services, such as vehicle service and collision repair services, as well as placement of finance and lease contracts, third-party insurance products, and other aftermarket products.

The company also operates 14 dealerships locations of heavy and medium duty trucks primarily under Freightliner and Western Star brand names, as well as offers a range of used trucks, and service and parts. In addition, it is involved in the sale and placement of third-party finance and insurance products, third-party extended service and maintenance contracts, and replacement and aftermarket automotive products.

Further, the company distributes commercial vehicles and parts to a network of more than 70 dealership locations, including 3 company-owned retail commercial vehicle dealerships. As of December 31, 2015, it operated 355 automotive retail franchises, of which 181 franchises are located in the United States; and 174 franchises are located outside of the United States primarily in the United Kingdom.

Penske Automotive Group, Inc. is headquartered in Bloomfield Hills, Michigan.

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Click to enlargeHere is a link to the full presentation, scroll down the page to "Q4 2015 Earnings Presentation."

Click to enlarge Spirit Airlines, Inc. (NASDAQ:SAVE)

Spirit Airlines, Inc. provides low-fare airline services. As of December 31, 2015, the company operated approximately 385 daily flights to 56 destinations in the United States, the Caribbean, and Latin America, as well as had a fleet of 79 Airbus single-aisle aircraft comprising 29 A319s, 42 A320s, and 8 A321s.

It offers tickets through its call center and airport ticket counters, as well as online through spirit.com; and through various third parties, including online and traditional travel agents and electronic global distribution systems.

The company was formerly known as Clippert Trucking Company and changed its name to Spirit Airlines, Inc. in 1992. Spirit Airlines, Inc. was founded in 1964 and is headquartered in Miramar, Florida.

Click to enlarge Click to enlarge Here is a link to the full presentation.

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Synchronoss Technologies, Inc. (NASDAQ:SNCR)

Synchronoss Technologies, Inc. provides cloud solutions and software-based activation for mobile carriers, enterprises, retailers, and original equipment manufacturers (OEMs) worldwide.

The company's solutions include activation and provisioning software for devices and services, cloud-based sync, backup, storage and content engagement capabilities, broadband connectivity solutions, analytics, identity/access management, and secure mobility management that enable communications service providers, cable operators/multi-services operators, and OEMs with embedded connectivity, multi-channel retailers, medium and large enterprises, and their consumers, as well as other customers to accelerate and monetize value-add services for secure and broadband networks and connected devices.

Its Activation Services, Synchronoss Personal Cloud, and Enterprise and Integrated Life platforms provide automated on-demand, end-to-end order processing, transaction management, service provisioning, device activation, intelligent connectivity and content transfer, synchronization and social media, identity and access management, and secure mobility management, as well as enterprise-wide sharing/collaboration through multiple channels, including e-commerce, m-commerce, telesales, enterprise, indirect, and retail outlets. The company markets and sells its services through direct sales force and strategic partners.

Synchronoss Technologies, Inc. was founded in 2000 and is headquartered in Bridgewater, New Jersey.

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Here is a link to the full presentation, scroll down the page to "Q3 2015 Earnings Call Presentation."

Click to enlargeSwift Transportation Company (NYSE:SWFT)

Swift Transportation Company operates as a multi-faceted transportation services company in North America. The company operates through four segments: Truckload, Dedicated, Swift Refrigerated, and Intermodal.

The Truckload segment provides services through one-way movements over irregular routes utilizing company's and owner-operator tractors with dry van, flatbed, and specialized trailing equipment in the United States, Mexico, and Canada.

The Dedicated segment offers tailored solutions under long-term contracts utilizing refrigerated, dry van, flatbed, and other specialized trailing equipment.

The Swift Refrigerated segment primarily offers shipments for customers who require temperature-controlled trailers. This segment's shipments include one-way movements over irregular routes, as well as dedicated truck operations.

The Intermodal segment moves freight over the rail in containers and other trailing equipment; and provides drayage services to transport loads between the railheads and customer locations. The company also offers logistics and freight brokerage services, as well as support services to its customers and owner-operators, including repair and maintenance shop services, equipment leasing, and insurance.

As of December 31, 2015, it operated a fleet of 15,211 company tractors and 4,653 owner-operator tractors; 65,233 trailers; and 9,150 intermodal containers from 40 terminals near key freight centers and traffic lanes. Swift Transportation Company serves various customers primarily in the retail, food and beverage, consumer products, paper products, transportation and logistics, housing and building, automotive, and manufacturing industries.

The company was formerly known as Swift Holdings Corp. Swift Transportation Company was founded in 1966 and is headquartered in Phoenix, Arizona.

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Here is a link to the full presentation.

Click to enlargeGentherm Incorporated (NASDAQ:THRM)

Gentherm Incorporated designs, develops, and manufactures thermal management technologies and automotive cable systems. The company operates through two segments, Automotive and Industrial.

The Automotive segment offers automotive seat comfort systems, including seat heaters, as well as variable temperature climate control seats that provide individualized thermal comfort to automobile passengers; and integrated electronic components, such as blowers and electronic control units. This segment also provides specialized automotive cable system products, including ready-made wire harnesses and related wiring products; automotive steering wheel heaters, heated and cooled cup holders, and thermal storage bin products; and non-automotive products comprising heated and cooled mattress and furniture.

The Industrial segment offers remote power generation systems for industrial applications; and is involved in the research and development of thermal management systems. The company primarily sells its products to automobile and light truck original equipment manufacturers or their tier one suppliers in North America, Europe, and Asia.

The company was formerly known as Amerigon Incorporated and changed its name to Gentherm Incorporated in September 2012. Gentherm Incorporated was founded in 1968 and is headquartered in Northville, Michigan.

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Here is a link to the full presentation.

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Summary and Conclusions

As previously stated, this article represents just a brief introduction into small-cap investing. With that said, I feel compelled to warn the reader against holding over-generalized views on small-cap stocks. As I also stated earlier, the only thing that all small caps have in common is size. Consequently, I reject common refrains such as small caps outperform or recently outperformed large caps. Sometimes they do, or have, and sometimes they don't. There are really good small-cap investments, and there are really bad small-cap investments. It's not size that makes the business nor is it size that ensures growth.

Just as it is with all stocks, there are many factors that need to be considered, evaluated and analyzed. In other words, and perhaps especially with small-cap stocks, there is no substitute for comprehensive research and due diligence. However, with small caps that process can be even more challenging because it is very difficult to find quality research on small companies. In the same vein, I believe this also represents another risk associated with small-cap investing. And furthermore, I believe that small-cap investing requires more diligence and monitoring. The business prospects of a small company can change for the worse in an instant. Therefore, if you choose to invest in small caps, be prepared to put in some extra work. For some, the potential rewards may be worth it.

Finally, I want it to be clear that I have not thoroughly researched the 10 candidates presented in this article. On the other hand, and for disclosure, there are a few on the list that I have researched and invested in. However, I am fully cognizant of the risks I am assuming by doing so. Therefore, I suggest that the reader interested in small-caps pick and choose among the list presented, and most importantly, conduct your own research and due diligence.

Disclosure: Long ECHO, AIRM, HIBB, SNCR, THRM

Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.

Disclosure: I am/we are long ECHO,AIRM,HIBB,SNCR,THRM.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.