Most investors want to align themselves with companies that have great growth potential and minimal risk. While there is no way to completely avoid risk, especially with stocks at the small cap level, there are methods for finding companies that are better off than others. Today, we developed a list of small cap stocks that possess two important qualities: profitability and significant growth projected for the next five years. When these traits are working in tandem, it often points to companies that have a keen eye for fiscal management and well prepared strategies to maintain growth. Take a look at the short list of small cap stocks below to begin your own evaluation.
Return on Assets (ROA) illustrates how much a company is generating in earnings from its assets alone. This metric gives investors a picture of how profitable the company is relative to the assets in current possession. As well, it lets investors see how efficient and effective management is at generating earnings from the company's assets. While most management teams can probably make money by throwing money at an issue, very few can make very large profits with little investment.
The Net Margin is a profitability metric that illustrates, by percentage, how much of every dollar earned gets turned into a bottom line profit. This is just one of many profitability metrics used by investors and analysts to better understand what the company is being left with at the end of the day. Generally, a firm that can expand its net profit margins over a period of time will see its stock price rise as well due to the trend of increasing profitability. Net Margin = Net Income/Total Revenue
EPS growth (earnings per share growth) illustrates the growth of earnings per share over time. The 5-Year Expected EPS Growth Rate is a long term annual growth estimate, where the growth projections are made by analysts, the company or other credible sources.
We first looked for small cap stocks. We then screened for businesses with strong profitability (ROA > 10%)(Net Margin [TTM] >10%). We then looked for companies with estimated high-growth, with 5-year projected EPS growth above 25%. We did not screen out any sectors.
Do you think these small-cap stocks will perform well? Use our list, along with your own analysis.
1) Francesca's Holdings Corporation (FRAN)
|Industry||Specialty Retail, Other|
|Return on Assets||37.02%|
|5-Year Projected Earnings Per Share Growth Rate||35.00%|
Francesca's Holdings Corporation, through its subsidiary, Francesca's Collections, Inc., operates a chain of retail boutiques under the Francesca's Collections brand in the United States. Its retail boutiques offer apparel, jewelry, accessories, and gifts to female customers. As of April 28, 2012, the company operated 327 boutiques in 43 states. It also sells its products through e-commerce Website, francescascollections.com. The company was founded in 1999 and is headquartered in Houston, Texas.
2) Liquidity Services, Inc. (LQDT)
|Industry||Catalog & Mail Order Houses|
|Return on Assets||18.40%|
|5-Year Projected Earnings Per Share Growth Rate||34.17%|
Liquidity Services, Inc. operates various online auction marketplaces for surplus and salvage assets in the United States. Its auction marketplaces include liquidation.com, which enables corporations and selected government agencies located in the United States to sell surplus and salvage consumer goods and capital assets; govliquidation.com that enables government agencies to sell surplus and scrap assets; govdeals.com, which enables local and state government entities, including city, county, and state agencies, as well as school boards and public utilities located in the United States to sell surplus and salvage assets. The company also operates secondipity.com that provides consumers a source of products and a socially conscious online experience through donating a portion of the proceeds of every sale to charity; and truckcenter.com, a marketplace for the sale of idle, surplus, and used fleet and transportation equipment. Its marketplaces provide professional buyers access to supply of surplus and salvage assets presented with customer focused information, including digital images and other relevant product information along with services to complete the transaction; and enable corporate and government sellers to enhance their financial return on excess assets by providing liquid marketplaces and value-added services that integrate sales and marketing, logistics, and transaction settlement. The company offers approximately 500 products organized into various categories, including consumer electronics, general merchandise, apparel, scientific equipment, aerospace parts and equipment, technology hardware, energy equipment, industrial capital assets, fleet and transportation equipment, and specialty equipment. Liquidity Services, Inc. was founded in 1999 and is headquartered in Washington, District of Columbia.
3) Constant Contact, Inc. (CTCT)
|Return on Assets||11.15%|
|5-Year Projected Earnings Per Share Growth Rate||35.17%|
Constant Contact, Inc. provides on-demand email marketing, social media marketing, event marketing, and online survey products primarily in the United States. It offers email marketing products, which allow customers to create, send, and track professional and affordable permission-based email marketing campaigns; and social media marketing products that allow customers to manage and optimize their presence across multiple social media networks. The company also provides event marketing products, which enable its customers to promote and manage events, communicate with invitees and registrants, capture and track registrations, and collect online payments; and online survey products that enable its customers to create and send surveys, and analyze the responses. In addition, it offers customer support services to customers and trailers through phone, chat, email, and social media. Further, the company provides ancillary services, such as custom services to customers who like its email campaigns, event promotions, or surveys prepared for them; and online training programs to educate participants on email marketing and social media marketing best practices, as well as a workshop program. It markets its products directly for small organizations, including retailers, restaurants, law and accounting firms, consultants, non-profits, religious organizations, and alumni associations. The company was formerly known as Roving Software Incorporated and changed its name to Constant Contact, Inc. in 2006. Constant Contact, Inc. was founded in 1995 and is headquartered in Waltham, Massachusetts.
*Company profiles were sourced from Google Finance and Yahoo Finance. Financial data was sourced from Finviz on 08/30/2012.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.