7 Smacked-Down Small-Caps Worth Investigating

by: Alan Brochstein, CFA

Not every plunge should be bought, but often beaten up stocks represent overreactions and potential opportunities. For instance, I recently screened the Russell 1000 and found a dozen disasters. While most of those were not something I felt strongly about and a few weren't interesting, one, Constellation Brands (NYSE:STZ), has soared subsequently as the situation I described has taken a turn for the better.

With smaller stocks, which are more volatile than large ones, there are always lots of beaten up stocks. With the goal of narrowing the universe of 67 stocks in the Russell 2000 trading more than 10% below the 50dma to a more focused list, I ran the additional screen:

  • 50dma > 200dma
  • 2yr Price Return > S&P 500 (14%)
  • 2yr Price Return < 50%

The goal, then, was to find stocks that have performed well and have some technical positives but that have perhaps corrected. Here is what met the criteria:

The stocks are sorted by YTD return, from lowest to highest. I also have highlighted the 5 that have net cash on the books, the six that have been growing earnings faster than the S&P 500 and the four that have grown sales faster than the S&P 500. Finally, note that three have relatively high short-interest ratios.

I am familiar with a few, but, as is usually the case when looking at Small-Caps, a few I have never looked at before. Keep in mind that these aren't recommendations. I would expect that some of these actually won't work!

Cincinnati Bell (NYSE:CBB) just did an IPO of its data center operations, which it had set up as a REIT, Cyrus One (NASDAQ:CONE), where it retains majority ownership. Perhaps the run-up was due to excitement over that deal. The board just named a 25-year GE veteran as the new CEO. Ted Torbeck had joined CBB in 2010. The company reports Q4 on 2/27.

Kimball International (KBALB) is one I know fairly well. Based in Jasper, Indiana, the company has two unrelated operations, including a global EMS company and a furniture manufacturer. I used to own it in my Top 20 model portfolio but gave up on it in early 2012 after management conveyed to me that there was nothing else they could do to improve their business beyond waiting for the economy to improve. The stock flew after we exited and now has returned to a reasonable valuation I guess. It trades slightly below tangible book value. If I thought that they might split the two businesses, I would be more interested.

Premier Exhibitions (NASDAQ:PRXI), which is based in Atlanta and provides museum quality exhibitions all over the world, reported its Q3 in early January. Sales grew nicely due to merchandising revenue primarily, but the company disclosed that the South Street Seaport exhibitions will remain closed indefinitely following Sandy. I think this one sounds interesting. If you are going to look at it, be aware that Sellers Capital owns 44% of the company. There has also been an activist investor, Greggory Schneider, who disclosed a 6.3% stake (as of 12/21) at an average cost of $2.17. He is pushing for sale of the operating business after the company sells its RMS Titanic subsidiary.

Ann Inc (NYSE:ANN) was already under pressure when it was slammed earlier this month on Q4 update. The company announced that it expected overall sales of $608mm for Q4, including a 1% comparable sales decline. Original guidance was $625mm. Its two concepts, Ann Taylor and LOFT, performed very differently, with Ann Taylor comping positively at the store (5%) but suffering a 7% decline at Ann Taylor Factory, while LOFT comped -2%, with weakness at the store and especially at the outlets. GM improved to 49% but was below company expectations (51%). They report year-end on March 8th. I think that this could be a great contrarian entry and find the stock to be very inexpensive. Analyst estimates have dropped, but the current consensus for 2013 (FY14) is 5% sales growth and 16% EPS growth. The stock trades at 12X the FY14 consensus, and the balance sheet showed cash at Q3 in excess of $3 per share.

I had never heard of Guidance Software (NASDAQ:GUID), which offers the EnCase platform which helps government agencies, corporations and law enforcement organizations conduct computer investigations and respond to regulatory inquiries. The stock was slammed in early February, when the company guided to 10-13% sales growth, which was in line with expectations, but a low earnings guidance as it expands sales capacity and invests in marketing initiatives. Sometimes these short-term hits to earnings drive great long-term results but scare off hypersensitive earnings momentum investors. This one looks interesting too. Some have suggested that the company might benefit from Autonomy's challenges.

Raptor Pharma (NASDAQ:RPTP) is another one I don't know. The biotech company is apparently waiting to hear from the FDA on PROCYSBI, which is a potential treatment of nephropathic cystinosis, with a PDUFA date of 4/30/13 after a 3-month extension that was issued in late December.

The last one, Elizabeth Arden (NASDAQ:RDEN), may be the most interesting of all. It has been in a solid uptrend for quite some time and just recently pulled back from an all-time high in late January after missing and cutting guidance. For FY13, the make-up maker guided to $2.30-2.50, which was well below the consensus of $2.66 but up from $2.06 in FY12, reducing its sales growth forecast to "just" 9-11% after previously guiding for 13.5-15% growth for the year. In Q2, sales grew about 9%, down from the 13.5% growth in Q1. I have been meaning to look into this one, as they seem to be in the early stages of a massive brand revitalization. 14PE and 10X EV/EBITDA seems like a pretty good entry price.

This look at the Russell 2000 has been focused on finding some stocks that have been hammered recently but that are in longer-term up trends and that are potentially consolidating. RDEN, ANN and PRXI look interesting to me. As always, I look forward to what you readers think about the names.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.