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Passive Income Trader Using Small Cap Stocks
Using a simple, very specific catalyst, this membership focuses on penny stocks and takes advantage of some of the most volatile movement seen in the stock market today.

3 Dreamy Small Cap Stocks by Zacks Investment Research

Everyone knows the big cap stocks because everyone owns them. You know the names: Apple, Google, Johnson & Johnson, McDonalds. I could go on and on. Some of the large caps, like General Electric, have been around for over a hundred years.

There's nothing new or unknown about any of these companies. As an investor, they make you feel safe. The large caps are like a trusty childhood blanket.

But small cap companies are different. There's an air of mystery about many of them. They're usually not in the news much. Few analysts tend to cover them. Most average people on the street have never heard of them. They seem scary and risky.

So why buy them?

Because the returns can be far greater on a fast growing small cap company than a stodgy, slow growing big cap.

But you have to know where to look because not all small cap stocks are created the same. Some companies aren't profitable. Some consistently miss earnings estimates. Others aren't growing as quickly as they should be.

It's easy to get sucked into a small cap nightmare.

Finding the Best Small Cap Stocks

To reduce the risk, I came up with a list of criteria for my "dream" small caps.

1. It must be a Zacks #1 Rank (Strong Buy)- which means that there is at least one analyst covering the company and the estimates are likely rising.

2. It has to be profitable. Show me the money!

3. There must be double digit earnings growth forecast for 2013. If I'm going to buy a small cap, I want to be able to cash in its explosive growth.

I then screened stocks using Zacks Research Wizard to find the best stocks that matched my criteria. I had several dozen stocks to choose from but I also wanted companies in different industries that also had good stories. Here's what I found.

3 Dream Small Cap Stocks

Hooker Furniture Big 5 Sporting Goods Tower International

1. Hooker Furniture (HOFT)

Hooker Furniture makes wood furniture including home entertainment, home office, accent, dining and bedroom furniture in the upper-medium price points under the Hooker brand and in the moderate price point under the Envision Lifestyle Collections brand. In business sine 1924, the Virginia-based company has seen a lot of different business cycles.

The furniture industry is picking up momentum as housing picks up momentum. In April, the company reported fiscal 2013 results which saw net income rise 71% compared to fiscal 2012. The upholstery segment, for example, returned to profitability in fiscal 2013 after reporting operating losses all the way back to the second quarter of fiscal 2009. In the fiscal fourth quarter of 2013, sales in the upholstery segment rose 10.4%.

The company has $26.3 million case on hand as of Feb 3, 2013, which is down $15.7 million from a year ago due to an increase in inventories. Hooker is making sure it has its best sellers in stock as momentum increases. More impressively, the company had no long-term debt. $13.2 million was also still available on its $15 million revolving credit facility with $1.8 million reserved for standby letters of credit.

"We're encouraged by the sustained improvement in housing sales, new home construction, rising housing prices, reduced housing inventories, historically low mortgage rates and the best housing affordability in years. All of this bodes well for our industry," said Paul B. Toms Jr., chairman and CEO in April.

Zacks Rank = #1 (Strong Buy)
Expected earnings growth for fiscal 2014 = 18.8%
Forward P/E =18.1
Market Cap = $184 million

The housing plays aren't a secret anymore. Hooker shares are trading near multi-year highs.

2. Big Five Sporting Goods Corporation (BGFV)

The consumer is alive and well in America. Big 5 Sporting Goods operates 414 stores in 12 western states that sell sporting goods and accessories including athletic equipment for team sports, fitness, camping, hunting, fishing, snowboarding and in-line skating.

On Apr 30, the company reported fiscal 2013 first quarter results and blew by the Zacks Consensus by 62%. Same store sales jumped 10.5% even though they were negatively affected by the Easter holiday, which was in Q2 last year. The company shuts its stores on that day.

"We believe these results for the quarter reflect the ongoing enhancements to our merchandise and marketing programs, the continued benefit from the national increase in demand for firearms and ammunition products and more favorable weather conditions in a majority of our markets versus the prior year. Our positive sales trends have continued into the second quarter and we feel well positioned to deliver strong results as we move through the spring and into the summer season," said Steven G. Miller, Chairman, President and CEO in April.

Zacks Rank = #1 (Strong Buy)
Expected earnings growth for fiscal 2013 = 77%
Forward P/E = 16.2
Market Cap = $450 million

As an added bonus, investors get a dividend which is currently yielding 1.9%. It's unusual to see a small cap company pay a dividend, let alone one that is this hefty.

3. Tower International (TOWR)

The auto industry has staged a powerful rebound from its Great Recession lows. Tower International has been able to cash in on the turnaround as it makes body-structure stampings, frames and other chassis structures, as well as welded assemblies for cars, crossovers, pickups and SUVs in 29 locations around the world.

On May 2, the company blew away the Zacks Consensus Estimate for the first quarter by 256%. Earnings were 32 cents compared to the consensus of just 9 cents. Revenue was up just 1% however as a struggling Europe saw lower industry production. All other regions were higher in the quarter however.

It also completed an early debt tender and re-financing which is projected to improve ongoing free cash flow by about 75 cents per share annually.

Tower raised full year guidance by 40 cents. As a result, 3 estimates have moved higher.

Zacks Rank = #1 (Strong Buy)
Expected earnings growth for 2013: 52%
Forward P/E = 12.2
Market Cap = $399 million

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The Market Authority reported that the Federal Reserve Chairman Ben Bernanke testified in front of the Joint Economic Committee. In his opening remarks, the head of the central bank has signaled that he shall continue to keep the current quantitative easing program in place. Traders and investors easily saw the decline in the U.S. Dollar Index after his comments were released. Chairman Bernanke warned that reducing the Federal Reserve's efforts to keep borrowing rates low would carry a substantial risk of slowing or ending the economic recovery. This means that he will keep interest rates at zero percent and continue to buy $85 billion a month worth of mortgage backed securities and U.S. Treasuries for the foreseeable future.

Elliott Wave International reported that yesterday U.S. stocks rose at the open but then reversed sharply lower. For the DJIA, it was the biggest 1-day swing in 6 months.

The move coincided with congressional testimony by the Fed Chairman Ben Bernanke. I say "coincided," because the market's mood, visible via Elliott wave patterns, was suggesting a nearby top even before Mr. Bernanke's comments.

See for yourself. As early as May 20, the S&P 500 was showing this wave pattern (partial wave labels shown):

(click to enlarge)

As you can see from the above chart, the market was finishing a wave 5, the ending wave of an Elliott wave sequence. That was the reason why before the open on May 22, our U.S. Intraday Stocks Specialty Service expected a move higher yet warned of a nearby top:

May 22, 2013 09:20 AM

Market Overview: Good morning. Higher futures numbers this morning suggest this advance may not be quite done. At least in the NASDAQ that is what the internals suggested for the fifth-wave of an ending diagonal, so a flexible view of the count in the other markets should be maintained. The internals for this move up from the April pivot low suggest all of five-waves up may be in place.

Another morning intraday comment gave an upper price target, 1683-1684:

5/22/2013 10:06:20 AM ET

The new high this morning suggest wave v is extending as a larger five, which would likely make this immediate action a third-wave within v. It was noted yesterday that a measure potential target was up around 1683/84. Looks like that's where trade is headed.

The topping expectation came true later on May 22, when the market hit a high of 1686.73 and reversed sharply to end the daylike this:

(click to enlarge)

From the intraday high of 1686.73, the S&P 500 fell 36 points.

Click here to find out what's next for U.S. stocks.

The Gold Meltdown - What Happened?

May 22, 2013 - Gold Mining Stocks Forecast Outlook by By Market Trend Forecast

I used to half joke with some of my investing friends that the best time to buy stocks is during or right after a crash. Think 1987, 2000-2002, 2008-09, and now perhaps Gold Miners?? Well, before we get too far ahead of ourselves, lets examine evidence of a "Crash": I like to use crowd behavioral, empirical, and technical evidence in combination.

1. In a recent money managers poll, virtually nobody was bullish on Gold or Gold stocks, and over 80% of those polled were bullish on the SP 500 and US stocks.

2. The percentage of Dumb Money traders (non-reportable traders) in the futures markets with short positions on Gold is at all time highs, they tend to be very long at the highs and very short at the lows.

3. The insider buying ratio of Gold Mining stocks to sellers is running over 10 to 1, the highest since October 2008 when Gold bottomed out at $685 per ounce from $1030 highs. Quoting Ted Dixon, CEO of Ink Research, "such a high level of buying interest among officers and directors within their own businesses in the resource sector has correctly foreshadowed a recovery in share prices in the past: That high point of nearly five years ago came about six weeks before the Venture market bottomed on Dec. 5, 2008…While the excitement that surrounded mining stocks as recently as two years ago has waned, experienced value investors recognize that such periods of investor neglect often give rise to the best deals" Source: Theglobeandmail.com

4. The ratio of the HUI Gold Bugs Index to the SP 500 is at multi year lows and in near crash mode on the charts. The RSI Index (Relative strength) on the weekly charts is at 10 year lows at -13.71, which is off the charts low!!

5. Most trading message boards I view at Stocktwits and others are universally bearish on Gold and Gold stocks.

6. Gold is in a wave B or Wave 5 down re-testing the 1322 lows which we have discussed here for weeks as very likely if 1470 was not taken out on the upside… this is a normal sentiment pattern and re-test.

7. Gold has been in a 21 Fibonacci month correction pattern off a 34 Fibonacci month rally from 686-1923. In August of 2011 I penned articles from 1805 right up to 1900 warning of a massive wave 3 top forming. Everyone was bullish, now it's the complete opposite.

8. Currency debasement continues around the world with negative real interest rates. This is bullish for Gold once this correction has run its course.

9. Hulbert Digest Gold Sentiment index is at an all time low (gold newsletters at -35 sentiment readings!!)

10. Gold -Silver put to call ratios are at all time highs

I could go on and on with headlines and such, but you get the idea. This is the same type of sentiment I wrote about on the stock market on Feb 25th 2009, here is that article... and nobody on the planet was bullish.

Below is a chart showing the Bullish % index for Gold Miners, as you can see the last time we were at 0% was late 2008 when Gold had bottomed out and insiders were also buying like crazy like now:

The GLD ETF chart also shows a likely re-test or slightly lower of the 1322 futures lows of April, when Insider buying hit 10 year record levels:

Obviously Gold could end up going a lot lower than we think, and the Gold Mining stocks could sink further yet. But for those with a 3-6 month horizon, we expect the 21-24 month Gold correction to complete by no later than October 2013. During the next several months the opportunities to buy some miners on the cheap will potentially make some investors a lot of money in the coming few years.

Click Here for a Free Trial of Market Trend Forecast

Intraday Forecasts on Gold Silver Copper and Aluminum
You get short, clear forecasts for the direction throughout the trading session, most with short-term Elliott wave-labeled charts. And you get precise support and resistance points, so you always stay in control of your position risk.

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By Wall Street Cheat Sheet
Join Chicago Mercantile Exchange commentator Eric McWhinnie as he covers Gold, Silver, Gold & Silver stocks, and miners. We look for companies that based on their price today are trading at a discount now or likely bigger discount 12 months from today. The takeover game is a huge part of the resource business. Quality undervalued companies will not remain so for long.

How To Forecast Gold & Silver Prices

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