Many investors tend to focus on large well established companies, but I’ve always had a penchant for small cap stocks. It could be my masochistic tendencies, but I prefer the risk/reward of a long shot, over companies who already dominate their market. Typically, my investment style has been to seek out strong brands that have fallen out of favor with the market and then wait for their fortunes to improve. Sometimes this involves waiting for years, sometimes it involves taking a complete loss and sometimes I get lucky and other firms step in and buy them out or bid up the price. Since a few of my readers have inquired about what sorts of things I look for in an investment, I thought I’d present a list of 25 small cap stocks that I currently have my eye on. Most of the data has been taken from Yahoo! finance as of 1/26/2010, so it’s probably a good idea to double-check the numbers.
1-800-Flowers (Market Cap = $136.47 million Ticker: FLWS) – Ever since United Online (NASDAQ:UNTD) purchased FTD, 1-800-Flowers seems to have lost market share, but despite their wilting fortunes, they represent a strong brand in a market with limited competition. After cutting operating expenses by $50 million in the second half of 09 and with Valentine’s day just around the corner, I wouldn’t count this one down and out.
Audiovox (Market Cap = $151.26 million Ticker: VOXX) – Despite having booked over a half a billion in consumer electronic sales over the last year, Audiovox doesn’t seem to get a lot of respect outside of the consumer electronics industry. With $361 million in shareholder equity, the firm is trading at half of their book value. While the company has lost over $50 million in the last 12 months, these losses are largely attributed to one time charges. With the firm having hit profitability in the last 3 quarters, a turnaround may be in sight for patient investors.
Bank Of The Internet (Market Cap = $87.61 million Ticker: BOFI) – While many local California banks made some pretty terrible loans during the housing boom, BofI was considerably more conservative with their assets. The market may have discounted them along with the rest of the financial community, but a closer look at their balance sheet suggests that this may be a hidden gem in all the rubble. With a charter that allows them to operate in every US state, there is a lot of potential for this little known company. With some of the highest interest rates on cash deposits, they’ve been able to attract deposits during a period where most banks have seen their customer base contract. For fiscal year 2007, they had revenue of $45.7 million, in 08′ they booked $64.8 and in 09′ they had $81.1 million. While I’m no longer a customer of the bank, from past experience I can personally attest, that they have the best customer service of any financial institution that I’ve ever worked with.
Big Band Networks (Market Cap = $205.92 million Ticker: BBND) – Since its debut in 2007, this content delivery network has seen their stock price fluctuate between $3 a share to $20.44. The company did lose $11 million in the last quarter, but had they not been investing in research and development they would have generated a small profit. While they do owe approximately $70 million in debt, with $161 million in cash and short term investments, they should have the stamina to make it through the market’s bust. Sitting at the epicenter of online video movement, there’s a lot of potential for this Silicon Valley company.
Calamos (Market Cap = $237.42 Ticker: CLMS) – When it comes to convertible bond investing, Calamos has set the gold standard for fund managers. While revenue is down over 20% since the market collapsed in 2008, I don’t believe that this is proper justification for trading at less than 1 times their trailing 12 month sales. With a strong management team, a fantastic brand and their recent return to profitability, I think that the company is undervalued. With their latest dividend reflecting a 2.4% yield, I’m willing to wait for their turnaround.
ClickSoftware Technologies (Market Cap = $200.88 million Ticker: CKSW) – ClickSoftware helps companies better manage their workforce. Since the beginning of 2009, they’ve seen their stock rise almost 400%, so they’re not exactly a secret. Nonetheless, this Israeli company has demonstrated some pretty impressive metrics. In fiscal 06′ they had $32.4 million in revenue, in 07′ this rose to $40 million. In 08′ they recorded $52.3 million in sales and for 2009, they are expected to report approximately $61 million. With the company having made three small acquisitions in the past year and realizing 67% gross margins, it would appear that they have a bright future ahead of them. With $48.6 million in current assets and only $22.2 in liabilities, they should be able to survive for a very long time, especially if they continue to remain profitable.
DivX Inc. (Market Cap = $180.25 Million Ticker: DIVX) – After making a huge splash in 07′ and hitting a billion dollar market cap following their IPO, DivX has been a huge disappointment for many investors. While there are long term questions about their business model and management has given no indication that revenues won’t continue to drop, with $139 million in cash and short term investments and only $25.6 million in liabilities, the stock is certainly priced at a bargain. Given their unique position in the digital media space, I can think of a number of large competitors who wouldn’t mind taking advantage of the market’s short-sightedness.
Double-Take Software (Market Cap $216.34 million Ticker: DBTK) – Even before cloud computing was a buzz word, Double-Take was working towards building remote solutions for businesses. After seeing their revenues rise over 50% between 2006 – 2008, the company experienced some turbulence in 09′. For the first 9 months of the year, they recorded revenue of $60.4 million, compared to $71.3 million for the similar time period in 08′. Nonetheless, when you consider that they are still booking a gross profit of 89%, there is a lot here to like. With financial and insurance companies representing some of their biggest customers, it may take time for them to return to their highs, but with nearly 4 times as many assets as they have liabilities, the company should have no problem surviving.
Geek.net (Market Cap = $77.41 million Ticker: LNUX) – As a self professed Geek I may be a bit biased on this one, but with the company trading at just $10 million above their book value, I think that this could be an extremely attractive acquisition for the right partner. Through sites like Slashdot, Sourceforge and ThinkGeek, they’ve been able to build an audience of over 40 million unique visitors each month. When you consider that their core audience tends to be primarily male developers with a lot of disposable income, I’m not surprised that their revenue has grown despite a collapse in the online ad markets. Recent insider selling and the lack of profitability may be cause for concern, but I believe that their core brands are too valuable to be trading at such a steep discount.
IncrediMail (Market Cap = $77 million Ticker: MAIL) – Since hitting their bottom in late 2008, IncrediMail’s stock before has been nothing short of incredible. With the stock up over 400%, there’s room for it to take a breather, but based on their most recent dividend, investors are earning an approximate 10% yield. While it’s always possible that they could quit paying back returns to their shareholders, with revenues up 25% for the first 9 months of 09, the trend is headed in the right direction.
Jackson Hewitt (Market Cap = $101.27 million Ticker: JTX) – They say nothing is certain in life except death and taxes and given Jackson Hewitt’s past sins, it’s fair to say that both may still be in store for this company’s future, but with the stock trading at 10% of past valuations, there’s also room for an impressive “dead cat bounce”. After getting busted for issuing problematic refund anticipation loans there’s an unknown liability that hangs over this firm, but with the company trading at 0.40 times their 12 months sales, the risk/reward is attractive for the troubled tax preparer.
Internap (Market Cap = $247.71 million Ticker: INAP) – Like many of the CDN players, Internap has seen their stock price hit with a buzzsaw as investors re-evaluated the long term potential of internet delivery. While Akamai may have a firm grasp on this market, I believe that there’s a lot of untapped value in this company. With over $250 million in revenue over the past year and over a billion dollars worth of tax losses, this small little video provider is ripe for consolidation.
Lasercard (Market Cap = $75.85 million Ticker: LCRD) – After a history of losses, this Silicon Valley security company appears to have turned the corner with their business model. During 2009, they blew through their net operating losses and have once again begun paying taxes on their profits. While their revenue tends to be concentrated with a few customers, recent contract wins with the governments of Hungary and Angola should provide some much needed diversification over the next year. Their leverage is a little bit higher than I’d like to see, but with a successful underwriting early last year and a bright future for the global security market, they should be OK over the near term.
Lojack (Market Cap $74.57 million Ticker: LOJN) – Caught between the wrong end of a patent lawsuit and the collapse of the auto market, Lojack has been absolutely hammered over the last few years. With the stock down more than 80% from their all-time high, it would be easy to write this one off as a tax loss. Despite the challenges that they’ve faced, though, I believe that their unique technology and brand can easily be ported into other industries and that their recent losses will only prove to be temporary. With sticky contracts with law enforcement agencies and the potential to once again realize strong earnings, I think the company has been undervalued by investors.
Motorcar Parts of America (Market Cap = $68.22 million Ticker: MPAA) – Despite their ticker symbol, MPAA doesn’t have anything to do with the entertainment industry. They’re a small firm that sells plain old boring alternators and starters for small trucks. While the auto industry has seen new car sales eviscerated over the last few years, it should provide an opportunity for companies who build replacement parts. With their current liabilities exceeding their current assets, it may be wise to wait until they raise more money before proceeding, but with the company trading at approximately half of their trailing 12 month sales, the market seems to have priced in the doom and gloom already.
OpenTV (Market Cap = $162.92 million Ticker: OPTV) – With the Kudelski group having already agreed to pay $1.55 per share, you won’t get rich off of investing in this set top box manufacturer, but there could be an arbitrage opportunity for those looking for a short term investment. Assuming that it takes them another 1 – 3 months to close the transaction, investors could expect an annualized yield of 10.75% – 3.22% respectively. While these transactions always carry the risk that something could derail them, I’d be surprised if the deal doesn’t get completed in the first quarter.
Primedia (Market Cap = $126.26 million Ticker: PRM) – From a high of $175 per share during the .com heyday, to its current price under $3 a share, it’s fair to say that the last decade hasn’t been very kind to Primedia investors. Despite their past performance though (and huge question marks about the ad market), there’s still life in this old dog yet. Over the last 12 months, they’ve been able to pull in approximately $270 million in ad revenue and while this is less than what they earned in 2008, it does suggest that their revenues are starting to stabilize. With an impressive portfolio of .com properties, once the ad market returns, Primedia is an a better position to recover than most.
Rentrak (Market Cap = $167.97 million Ticker: RENT) – DVD sales may be in a freefall, but Rentrak has done a good job of managing this decline. The company not only helps to distribute packaged media, but also sells industry data to the major studios. While on one hand, the current business trends would appear to be working against the firm, the decline in disc based media also makes that intelligence even more valuable. With the company trading at less than 2 times sales, it wouldn’t surprise me to see a firm like Nielsen try to buy them in an attempt to bolster their own portfolio.
Rocky Mountain Chocolate Factory (Market Cap = $51.65 million Ticker: RMCF) – While this pick violates a rule I have about never investing in restaurants, I’m willing to make an exception when it comes to chocolate. With $17.8 million in assets and only $3.7 million in debt, this small specialty retailer has a remarkably clean balance sheet. Sales may be down year over year, but thanks to a partnership with Cold Stone Creamery, there is potential for growth. Given the strength of their brand name, I could think of quite a few companies who wouldn't mind owning their brand.
Smith and Wesson (Market Cap = $235.94 million Ticker: SWHC) – Over the past two years Smith and Wesson investors probably feel like they’ve been shot in the gut. Despite revenue going through the roof, they’ve been sidelined by one blunder after another. With a messy balance sheet and company officials facing charges of bribery, this one may be dead on arrival, but with over $300 million in revenue and a terrific brand name I wouldn’t hesitate to take a second look once things get straightened out.
Sonic Solutions (Market Cap =$232.46 million Ticker: SNIC) – For a long time, Sonic seemed to be the little engine that just couldn’t. With a number of software products focused on digital media, success always seemed like it was just over the horizon, but delays from studio partners and the decline in demand for their DVD services put a crimp in their stock’s performance. After seeing a rebound of over 400% in 2009, investors may be setting themselves up for another disappointment, but recent agreements with Blockbuster Video (BBI) and a successful stock underwriting late last year have removed concerns about their near term future. While I still have doubts about their ability to execute, there’s no denying that the Roxio and CinemaNow brands have value.
SORL Auto Parts (Market Cap = $205.64 million Ticker: SORL) – Chinese companies always make me a bit nervous because it’s hard to trust their financials, but given China’s investment in infrastructure, there’s a lot of upside to the industry that SORL operates in. As a supplier of auto parts for Chinese trucks and buses, they’ve been immune to the issues facing the US auto sector. With assets representing more than 4 times their debt, they should be well positioned to capitalize on China’s own stimulus plan.
Spark Networks (Market Cap = $62.77 million Ticker: LOV) – Every since I made a bundle when IAC (IACI) bought out UDate, I’ve been looking for an internet dating site to court. While I may have missed the bottom when it comes to Spark Networks, I’m still attracted to their business model. Revenue, net income and their member base have both been heading in the wrong direction, but if their new Spark.com domain can take off, there’s still a lot to love.
SRS Labs (Market Cap = $98.73 million Ticker: SRSL) – Compared to heavyweights like Dolby, SRS is a 98 pound weakling in the audio technology industry, but don’t let their size fool you about the quality of their technology. Recently the company announced that their partners have shipped over 30 million certified devices. Perhaps even more impressive though is that the company operates at 99% gross margins. With their technology able to prevent the sound fluctuations between your programs and commercial breaks, I see a bright future ahead. When you also consider that the company has over $50 million in assets and less than $3.5 million in debt, I think it’s a steal at their current valuation.
Stamps.com (Market Cap = $140.77 million Ticker: STMP) – Over the last few years, Stamps.com’s revenue has been more or less stagnant, but with limited competitors they should be able to maintain a pretty good hold on their niche market. With the recent growth in home based businesses, the company is poised to capitalize on FedEx’s (NYSE:FDX) losses. With a balance sheet heavy on assets and light on liabilities all it would take is a dividend or a share buyback to make this stock attractive.
Full Author Disclosure: I currently own shares of Calamos and Lojack.
Disclaimer – This post should not be construed as investment advice or a recommendation to buy or sell any of the securities mentioned. Small cap stocks in general tend to be much more dangerous than larger companies and investors are highly encouraged to speak with their own financial adviser and to perform their own due diligence before considering an investment in any of the companies mentioned.