By Gordon Wilcox
Micro-caps, the group of stocks defined as having market values under $300 million, get bum wraps and it's not only because of the tiny market caps.
The bad reputation is arguably more the byproduct of the incessant emails promising "XYZ Inc. is sitting on 1 billion barrels of oil" or "ABC. Corp. has Apple (AAPL) shaking in its boots."
In other words, there's a lot of misinformation about micro-caps out there. Worse yet, there are a lot of shady characters behind the promotion of these nickel and dime stocks.
Bad apples spoil the barrel because there are actually some decent opportunities in the sub-$300 million universe. One just has to know where to look. Consider the following candidates:
Royale Energy Inc. (ROYL): California-based Royale Energy was up about 25% year-to-date at the start of trading and its sub-$62 million market value belies its liquidity and share price. This isn't some joke stock where the volume spikes from 1,000 shares on Tuesday to 1 million on Wednesday and then back to 1,000 on Thursday. This stock has average daily turnover of over 762,000 shares and at current levels is trading at $5.75.
Founded in 1986, Royale Energy today has more than 16 million barrels of proven oil reserves, implying Royale's reserves are worth far more than its market value. In late 2011 the company announced the purchase of a 100,480-acre position in Alaska and the company has no refining operations, which is a plus these days. Average price target: Almost $15.
Rocky Mountain Chocolate Factory (RMCF): Three reasons to like Rocky Mountain Chocolate Factory. First, the margins. In a recent article by Kapitall, the company has a trailing 12-month gross margin at 32.86% vs. industry average at 31.81%, a trailing 12-month operating margin at 16.89% vs. industry average at 11.62% and a trailing 12-month pretax margin at 17.08% vs. industry average at 9.23%.
Second, Rocky Mountain Chocolate Factory has no debt and that's not something every micro-cap on the block can say.
Third, Rocky Mountain pays a dividend. A pretty good one, in fact, as the shares currently yield over 4%. Good luck finding a debt-free micro-cap that pays a dividend. Oh wait, you just did.
Blue Dolphin Energy Co. (BDCO) Easily the most speculative name on the list if for no other reason than that BDCO was recently demoted to the Pink Sheets from Nasdaq, there is still some opportunity here for the adventurous among us.
Blue Dolphin Energy holds leasehold interests in oil and gas properties located in the U.S. Gulf of Mexico and the North Sumatra Basin in offshore Indonesia and the company is looking to part with some pipeline assets to bolster its balance sheet.
Beware, because this is a volatile stock. Single day performances in the past month include up 80%, down 7%, up 19%, down 9%, down 7% and up 7%. In the near-term, Blue Dolphin's Pink Sheets residence could lead to a pullback, so wait for that to transpire before jumping in.
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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.