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Small is not so beautiful when the economy is hobbled.
Small-cap stocks outperformed bigger issues for most of this decade, but they've taken their lumps since peaking in July on early warnings of a credit crunch.
The Russell 2000 ($RUT.X, news, msgs), an index that tracks companies with market values of between $250 million and $2.5 billion, finished in the red in 2007, its first down year since 2002. It's lost an additional 8.3% this year.
Using MSN Money's Deluxe Screener, and screening parameters created by columnist Harry Domash, we identified seven companies whose shares are bargains now but have the potential to recover from the problems that sank their share prices in the first place.
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Each company has a market value of less than $1 billion.
Among the companies the screen turned up today is TheStreet.com (TSCM, news, msgs), a provider of financial news online. The company -- founded by the nation's best-known and most exuberant stock picker, Jim Cramer -– recently sought to broaden its audience with the launch of a personal finance Web site called MainStreet, which links current events and celebrity news to everyday money topics.
The stock has been hammered this year -– down 47% -- on worries about a dilutive preferred-stock offering as well as declining subscription revenues as the markets swoon. The prospect of weakening advertising revenues also weighs on the New York company.
Analyst Richard Fetyko at investment firm Merriman Curhan Ford cited those headwinds last week in lowering his 2008 earnings estimate for TheStreet.com to 57 cents a share from 66 cents. "(But) even with our lowered estimates, the stock appears cheap relative to growth and long-term opportunity," Fetyko wrote in a note to investors.
Here is the complete list of stocks uncovered by the screen today, followed by a brief description of the companies and catalysts that could affect stock prices:
| Company | Industry | Price-to-sales ratio | Thursday's opening price |
|---|---|---|---|
Memory chips | 2.18 | $4.25 | |
Chips for flat panel displays | 1.02 | $4.99 | |
Multimedia communications equipment | 4.20 | $7.87 | |
Biotech | 3.93 | $8.17 | |
Investment and personal finance information | 3.92 | $8.40 | |
Mobile communications chips | 2.00 | $8.50 | |
Biotech | 3.10 | $9.07 |
American Oriental Bioengineering (AOB, news, msgs) is a Chinese company that combines biotechnology and traditional Chinese medicine to develop plant-based drugs and nutraceuticals, which are extracts of foods claimed to have medicinal effects on human health. Its herbal medicines and food supplements are sold in China as prescriptions and over the counter, and are designed to treat various ailments and disorders.
Among its key products are a prescription gel and an over-the-counter adhesive patch to treat bed-wetting. It also has over-the-counter soy peptide products, which AOB has suggested can inhibit the growth of tumor cells.
Barron's last year warned investors to take a hard look at some of the company's assertions. The magazine raised doubts about some medicinal claims found on labels and expressed skepticism about the company's stated intention of becoming one of China's biggest pharmaceutical companies and extending beyond China, where most of sales are now.
Acme Packet (APKT, news, msgs) makes networking products used by Internet-service providers. Its products are sold under the Net-Net brand and allow service providers to offer secure interactive communications across wireless, land-line and cable networks.
The Massachusetts company expects its business to grow along with the expansion of telephone calls over the Internet, which now handles less than 10% of voice traffic. Analysts expect that share to grow over the coming decade because VoIP, or Voice-over-Internet Protocol, is much cheaper than traditional phone service.
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In defense of small capsLori Calvasina, an equity strategist at Citigroup Global Markets, urges small-cap investors to get defensive. She sees opportunities among smaller health-care and consumer-staples companies. She's leery of smaller telecom and utilities stocks.
Among its power-management products is AudioDJ, which allows a CD to play in a notebook computer after the power is turned off. It also has a product, called E-Guardian, that allows secure e-commerce transactions with a financial smart card. The company hopes to parlay cash from a patent win against Sony (SNE, news, msgs) and Samsung into a push for product designs that can help drive sales gains.
ViroPharma (VPHM, news, msgs) discovers drugs to combat infectious diseases. Its sole product is Vancocin, an antibiotic used to treat a sometimes deadly bacterium that causes severe diarrhea and a type of colitis, mainly in elderly, hospitalized patients. The company says Vancocin is protected by patent until 2010, though investors have been worried it could face generic competition before then. The Food and Drug Administration is reviewing generic versions of the drug.
ViroPharma is developing Maribavir for treatment of cytomegalovirus disease in stem-cell-transplant patients. The Exton, Pa., company also has a treatment for hepatitis C in trials. The experimental drug, HCV-796, received fast-track status from the FDA last summer.
The stock was upgraded to "buy" from "neutral" by investment bank Janney Montgomery Scott on March 12. Analyst Brian Rye acknowledged the potential threat from generic versions of Vancocin, but said the company's strong balance sheet and positive cash flow presented investors with a "positive risk/reward ratio." Rye said he's increasingly confident of the company's ability to meet its 2008 earnings-per-share forecast, and he raised his price target on the stock by $1 to $15.
Himax Technologies (HIMX, news, msgs) supplies microchips used as components of flat-panel displays. The Taiwanese company's drivers and timing controllers are found in the displays of notebook computers, televisions, cell phones, DVD players, vehicle navigation systems and video cameras.
Himax in January introduced a new single-chip display driver for next-generation multimedia handsets. The company said it was ready to mass-produce the drivers, and that they should soon start showing up in smart phones and other portable devices.
Ramtron International (RMTR, news, msgs) makes memory chips used in a variety of applications and products, including handheld devices, laser printers and power meters.
The Colorado Springs, Colo., company makes its chips at a foundry in Japan and sells them to electronics OEMs (original equipment manufacturers) around the world. It has licensing and manufacturing partnerships with some of the world's biggest semiconductor makers, mainly in Asia but including Texas Instruments (TXN, news, msgs).
Setting up the screen
Domash cautions investors against expecting to score easy gains on cheap stocks, many of which got that way because market players saw serious, fundamental problems that probably won't go away. Thus, many are likely to get even cheaper.As a starting point for additional research, however, the screen offers investment ideas that can isolate profitable companies in the cheap-stock universe. For more details on the screening criteria, click here.
Domash established the following screening parameters:
- The previous day's closing price must be less than $9.95 a share.
- The previous day's close must be above $2, a floor that reduces risk.
- The previous quarter's average daily trading volume must be at least 40,000 shares, to weed out dead or rarely traded stocks.
- A return on invested capital of at least 10%, to isolate companies with profits sufficient to support growth or reward shareholders.
- A price-to-sales ratio of 8 or less.
- Year-on-year revenue growth of at least 12% over the past 12 months.
- Revenue growth in the previous quarter must be at least 75% of the growth rate for the previous 12 months.
- Forecast earnings-per-share growth over five years of at least 15%.
- At least 30% of outstanding shares must be held by Institutional investors.
- Mean recommendation by analysts of "hold," "buy" or "strong buy."
- No company with a negative earnings surprise in its recent past.
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