I identified these three small-cap companies by screening for low debt, margins above 30%, and high revenue growth. They are all disruptive technology companies that have niche growth markets.
Research Frontiers (REFR) is a company that manufactures dimable glass. The product is marketed as SPD-SmartGlass, where SPD stands for "suspended particle device." The company owns the patent on a film that is licensed to producers of end-user products for a royalty of 10%. It has formed a partnership with Hitachi to manufacture the film.
The user is able to electronically regulate the tint of the window, at the touch of a button, and the transition is quick and has a wide range of tint capabilities. It is being adopted in Mercedes-Benz and BMW vehicles as well as airplanes, boats, and trains. The consumer appears to be in love with the product. It makes any product it is incorporated into cool and next-gen.
At full production, the Hitachi partnership could produce at least 100,000 sunroofs annually. The company claims to make at least $100 per sunroof so, at the low end of the Hitachi production capability today, it can earn 10 million in revenue in the next year. As it is a license, we can assume costs will remain relatively unchanged, so the roughly 4 million in net losses can be expected again this year. As the company just raised 5.5 million in cash, it should have enough funds to see it through the year. This scenario would result in net income of 6 million and EPS of 30 cents. At a forward P/E of 25, the company would trade at $7.50, or a gain of 97% above its current price of $4.11. This is a very conservative estimate of potential earnings and forward P/E, given the increasing adoption of the technology across multiple industries.
Of course the company is more optimistic. It believes it can attain 200 million in revenue from license royalties from the auto industry alone. If in two years, the company is making net income of $200 million with no further share dilution, and valued at 50X earnings based on stellar growth, the stock would trade at over $500.
This doesn't take into account the potential royalties stemming from use of the technology in airplane windows, building windows, and as-yet unrealized applications that require little or no additional R&D investment.
The cash reserves, exploding revenue from its sales pipeline, and diversified market potential of a product in the first stages of commercialization make Research Frontiers a very attractive company to own now that should achieve profitability this year.
Future Fuels (FF) is a producer of biodiesel. The production facilities in the Midwestern U.S. produce both biodiesel and specialty petroleum products derived from biodiesel. It is also developing methods to convert cellulosic biomass (woody plant matter) into biodiesel. Biodiesel is an excellent alternative fuel option for several reasons.
- It is producible from a wide range of agricultural and industrial feedstock, including waste lipids (e.g. bacon fat), and algae.
- It has a wide range of end-uses including the production of petroleum-based chemicals and liquid fuel.
- It can be used as a complete substitute for diesel in any diesel-burning engine (ethanol can only be used at low percentages in gasoline-burning engines).
With a current ratio of 7.31, it is very liquid and free of debt. Revenue and 5-year EPS growth are above 50%, driven mainly by steady increases in demand for biodiesel. Future Fuels is paying a dividend of 3.39%, and expects demand for biodiesel to remain strong. With increasing profit margins and sales, FF looks like a safe, income-generating alternative-energy play, similar in business model to an oil-and-gas refiner. With EPS growth above 50%, a P/E of 12 is highly undervalued. I expect the price of the stock can push above $20 in the next year. It currently trades at $11.64.
GT Advanced Technologies (GTAT) manufactures industrial devices that produce synthetic minerals for use in photovoltaic silicon wafers and LED sapphire diodes. The expanded use of LED sapphire diodes in mobile devices means that GTAT is poised to make higher revenue from purchases of its sapphire manufacturing equipment. Additionally, it sells a newly acquired device that lowers the cost of producing high efficiency PV cells. It has a backlog of over $1 billion - greater than the market cap of the company, and expects to have $250 million in cash at year's end. With a P/E of 5 in a growth industry, low debt and diversified revenue stream, it is undervalued. If it were trading at a P/E of 15, the stock would be priced at $17.85. It is currently trading at $6.55.