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  • Four Underestimated Stocks for the New Bull Market: MEA, IO, FIG, ZZ 0 comments
    Aug 6, 2009 11:55 AM | about stocks: MEA, IO, FIG, TPX

    With Sealy, Fortress Investments, ION Geophysical, and Metalico trading at penny stock prices, the onset of an economic recovery may be the right time to step into these names.

    Though the exuberance surrounding an economic recovery is a little excessive, the green shoots are for real. The latest round of earnings verifies that it is possible for a corporation to turn a profit... it's just not easy yet.

    With that backdrop in place, we continue to look for stocks that are best-positioned to reward investors as the economy improves. As is turns out, the four names we uncovered today are also, technically, penny stocks.... equities trading under $5.00. Not that investors should own a stock solely because of a low price, but a low-priced stock is a much easier mental hurdle to clear.  

    In any case, we encourage long-term value-seekers to consider Sealy Corp. (ZZ), Fortress Investment Group LLC (NYSE:FIG), ION Geophysical Corporation (NYSE:IO), and Metalico Inc. (NYSEMKT:MEA).

    How were these stocks selected? Multiple criteria were used.... fundamental, technical, and sentiment. It was a strict set of criteria too; very few names even qualified. As far the actual methodology goes though, it's too complex to bother describing here. Let's just suffice it to say we were looking for companies and stocks that got shellacked during the recession, have started to pull themselves up by their bootstraps, yet most of the market has yet to notice the improvement.

    Here's a closer look at all of them.

    To say that Sealy Corp. (ZZ) was a disaster in 2008 would be an understatement. Between a smaller top line and bigger expense lines (due to expensive materials), the company had enough to deal with as it was. Factoring in $41 million worth of one-time charges in fiscal Q4 of last year drove a nail in the coffin for the year.

    What investors may not realize is that most of those pains have been left in the past. Operating wise, the company has been profitable the last two quarters. Moreover, Sealy beat estimates the last two quarters.

    Now that $177 million worth of loans have been refinanced, the last of the big monkeys are off ZZ's back. The forward-looking P/E is 13.5.

    Fortress Investment Group LLC (FIG) took another loss last quarter, but they're getting incrementally smaller. The Q2 loss for this year was 41 cents per share, versus a loss of 67 cents per share in Q2 of last year.

    After taking out all the special items, Fortress earned 12 cents, topping operating earnings estimates of 7 cents.

    That's the second quarterly earnings beat in a row, and hints that (1) the asset management industry is recovering, and/or (2) Fortress knows how to earn in a tough environment.

    Either way, with FIG shares trading more than 80% below their 2007 highs, and at penny stock prices, this is a compelling way to play the financial sector.

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    Trading Alerts on MEA, IO, FIG, and ZZ.

    ION Geophysical Corporation (IO) is by far the most unique idea of our four today. The company makes seismic data equipment and software - and offers related services - for anyone who needs to know what lies below a particular piece of land. It's an obscure business, but not a small one... the company did 646 million in revenue last year.

    ION Geophysical is attractive right now not because they did well last quarter, but because disappointing earnings last quarter (reported on Wednesday) sent the stock much lower. In other words, a good stock is currently at a price that was unavailable before yesterday.

    Despite the loss of $5.5 million last quarter on $100.5 in revenue, we still expect demand to improve well enough to drive the estimated earnings of 21 cents by 2010.

    And finally, Metalico Inc. (MEA) may be an ideal way to capitalize on the steel/iron craze at penny stock prices.

    Metalico wasn't profitable last year. However, the company did beat estimates of a loss of 6 cents last quarter by earning 3 cents instead. And, that was an improvement from the same quarter a year earlier.

    With the company's debt being reduced on top of higher steel prices and better steel demand (which is common for most all economic rebounds), MEA's new bullish momentum probably isn't hollow. The forward-looking P/E of 35.6 may seem frothy, but the earnings estimates also may not fully reflect how well Metalico could do when back in full swing.

    So there you go - four stocks you may want to tuck away in your portfolio, but four stocks you probably wouldn't have heard about from the mainstream media.

    If you'd like to know of any changes in our opinion of these four picks (or if we officially recommend them as trades), be sure to sign up for free newsletter today. It's delivered 2 to 3 times per week.

    Stocks: MEA, IO, FIG, TPX
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