Top 5 Micro-Cap Stocks to Watch in 2014
After a stellar 30% run in 2013, analysts were expecting the S&P 500 to take a much deserved break in 2014. In fact, many predicted the S&P 500 would advance just five percent in 2014. By the end of the second quarter, the S&P 500 had already climbed more than six percent.
Entering the summer, Wall Street predicted the S&P 500 would take a breather. Again, it didn’t. Between June and August, the S&P 500 notched upward by four percent. Not only that, but in late June, the S&P 500 closed above 2,000 for the first time ever. By the end of August, the S&P 500 had reported 30 record closes for the year.
What about September? It’s supposed to be the worst performing month for the stock market, but it has started out strong. Thanks to encouraging economic data and positive signs coming out of Wall Street, the S&P 500 is bucking historical trends and continues to close above the 2,000 mark.
What does the rest of the year hold for the major stock indices? While the current bull market may be more than five years old, the much-anticipated correction just hasn’t materialized. In fact, the S&P 500, NYSE, and Dow Jones Industrial Average all have great momentum entering the second half of the year.
Sure, bull market investors can expect to experience bumps in the coming months, but by all accounts, the S&P 500 could chalk up another year of double-digit growth. After all, bull markets usually come to a screeching halt when fundamentals deteriorate and investor liquidity gets pulled from the market.
During the second quarter, overall earnings for companies on the S&P 500 increased eight percent year-over-year while revenues were up 4.4%. And the market strength was broad-based and driven by top-line growth—not just cost-cutting. Medical companies saw their earnings grow 15.7%, construction profits were up 14.2%, and the technology sector saw its earnings rise 12.4% year-over-year. (Source: Shinal, J., “First Take: Corporate America ends monster earnings quarter,” USA Today web site, August 21, 2014.)
Strong revenue and earnings across the board, ongoing momentum, and a resilient bull market bode well for micro-cap investors as we head into the latter part of 2014.
That doesn’t mean micro-cap investors who have been sitting on the sidelines have missed the boat. There are a large number of excellent micro-cap stocks out there with tremendous upside potential. The art is being able to separate the wheat from the chaff (i.e., separate the good companies from the bad).
There are a lot of terrible micro-cap stocks out there attracting attention simply because the bull market is going strong and investors are looking for places to park their investing dollar.
In the grand scheme of things, when it comes to investing in micro-cap stocks, it doesn’t matter where the stock market is heading. To find winners, you need to do your due diligence and take a critical look at the company’s fundamentals and technicals. That means strong companies with growing earnings and revenues, solid cash positions, manageable debt levels, and great long-term growth potential.
Also Read: Top 5 Micro-Cap Stocks to Watch in 2015
That won’t protect a micro-cap stock from giving up ground during a correction or unexpected market-wide turbulence, but it does mean it is better positioned to experience a legitimate rebound. Micro-cap stocks that do not have strong fundamentals, on the other hand, will find it extremely difficult to attract investor attention and recover.
What qualifies as a micro-cap stock? While some like to think a micro-cap stock is a company with a market cap of less than $300 million, the fact of the matter is that most investors look at the share price before they look at a company’s market cap. Simply taking the market cap into consideration would mean missing out on a lot of excellent micro-cap companies.
For example, during the Great Recession, a huge number of amazing companies slipped into micro-cap territory before rebounding with triple-digit gains. Ford Motor Company (NYSE/F), for example, was trading for as low as $0.94 per share in November 2008. Its market cap far exceeded the rule to be qualified as a micro-cap stock, but that’s exactly what it was. Paying attention to just the market cap would have meant losing out on a 1,700% gain.
So what qualifies as a micro-cap stock? Anything trading for less than $5.00. And to get you started on the right track, here are five examples of excellent micro-cap stocks to watch in 2014.
Hovnanian Enterprises, Inc. (NYSE/HOV) – With the U.S. housing market showing signs of a sustained rebound, it might be a good idea to look at firms that operate in the residential construction industry. Hovnanian Enterprises, Inc. markets single-family detached homes, condominiums, and townhomes throughout the U.S. As one of the nation’s largest homebuilders, Hovnanian has operations in Arizona, California, Delaware, Florida, Georgia, Illinois, Maryland, Minnesota, New Jersey, North Carolina, Ohio, Pennsylvania, South Carolina, Texas, Virginia, West Virginia, and Washington, D.C.
In early September, Hovnanian Enterprises announced its third-quarter revenues increased 15.2% year-over-year to $551 million. Third-quarter net income jumped 101% to $17.1 million, or $0.11 per common share. (Source: “Hovnanian Enterprises Reports Fiscal 2014 Third Quarter Results,” Hovnanian Homes web site, September 4, 2014; www.khov.com/Home/IR/InvestorEvents/NewsReleases.htm.)
Deliveries including unconsolidated joint ventures totaled 1,549 homes for the third quarter (ended July 31, 2014), a 3.1% increase compared to 1,502 homes in the fiscal 2013 third quarter. Management said it expects the company to be profitable for fiscal 2014, assuming there are no changes in the current market conditions.
Nevsun Resources Ltd. (NYSE/NSU) – Nevsun Resources Ltd. is a mining company that operates one of the highest-grade open pit base metal deposits in the world. Its flagship property is the Bisha Mine in East Africa. The mine produced low-cost gold-silver doré until mid-2013 when, through a $110-million copper expansion, throughput expanded to 2.4 Mtpa (million tonnes per annum) and the product switched to copper in concentrate. The total probable reserves for Nevsun’s Bisha Mine are 27.46 million tonnes. In 2014, Nevsun pursued an aggressive greenfield exploration program at Bisha to discover more satellite deposits. (Source: “Bisha Mine Overview,” Nevsun Resources Ltd. web site; www.nevsun.com/projects/bisha-main/#overview, last accessed September 9, 2014.)
With a strong balance sheet, a market cap of $824 million, $359 million in cash, zero debt, and future cash flow, Nevsun is positioned for growth while maintaining a strong 3.6% annual dividend.
Planar Systems, Inc. (NASDAQ/PLNR) – Planar Systems, Inc. develops, manufactures, and markets electronic display products and systems. The company has more than 60 innovations in the display industry for the world’s most demanding environments across many markets, including medical, space, security, utility, transportation, retail, government, business, and home theater.
The company has a market cap of $111 million and $11.5 million in cash with virtually no long-term debt. Planar announced that third-quarter revenues climbed 17% year-over-year to $43.9 million. The company also swung to third-quarter profitability of $706,000, or $0.03 per share, versus a loss of $3.56 million, or $0.17 per share, in the same prior-year period. (Source: “Planar Reports Fiscal Third Quarter 2014 Financial Results,” Planar Systems, Inc. web site, July 31, 2014; http://investor.planar.com/phoenix.zhtml?c=111133&p=irol-newsArticle&ID=1953912&highlight.)
As a result of the strong third-quarter performance and favorable outlook for the fourth quarter, the company increased its estimates for revenue and non-GAAP (generally accepted accounting principles) earnings per share (EPS) for the full fiscal year.
Planar anticipates fourth-quarter revenue in the range of $48.0 million to $50.0 million and non-GAAP income per share of $0.08 to $0.10. As a result, it has raised its estimates for fiscal 2014 and expects revenue in the range of $173.4 million to $175.4 million and non-GAAP income per share of $0.21 to $0.23.
Kopin Corporation (NASDAQ/KOPN) – Before “Google Glass” there was Kopin. Kopin Corporation is a leading developer and provider of innovative wearable technologies. The company’s patent portfolio of technologies includes ultra-small displays, optics, speech enhancement technology, software, low-power ASICs, and ergonomically designed mobile headset computing systems that are used across consumer, business, and military markets.
The company has a market cap of $258 million, $98.9 million in cash, and no long-term debt.
The company is progressing well in getting its wearable product offering ready by the end of 2014 and expects the major investment for its transformation will be completed with its cash position still very strong.
Recently announcing an expected increase in military sales in the second half of 2014, Kopin is increasing its expected full-year 2014 revenues to between $24.0 million and $28.0 million; that represents a year-over-year increase of between four percent and 21%. (Source: “Kopin Corporation Provides Business Update and Second Quarter 2014 Operating Results,” Kopin Corporation web site, August 6, 2014; http://ir.kopin.com/Investors/Press-Releases/Press-Release-Details/2014/Kopin-Corporation-Provides-Business-Update-and-Second-Quarter-2014-Operating-Results/default.aspx.)
LRAD Corporation (NASDAQ/LRAD) – LRAD Corporation designs, develops, and commercializes directed sound technologies and products in North and South America, Europe, the Middle East, and Asia. The company’s acoustic products beam, focus, and control sound over short and long distances. The company’s Long Range Acoustic Device (LRAD) creates a directed acoustic beam to communicate at operational ranges in high ambient noise environments and is used in military applications. The company sells its products directly to the government, the military, end-users, and defense-related companies.
LRAD has a market cap of $117.5 million, with $21.2 million in cash and no long-term debt. The company announced that revenues for the third quarter (ended June 30, 2014) soared 271% year-over-year to $8.0 million as a result of increased demand from the international market. The company also swung to profitability of $1.9 million, or $0.06 per diluted share, compared to a loss of $1.1 million, or $0.03 per diluted share, during the fiscal third quarter of 2013. (Source: “LRAD Corporation Reports Fiscal Third Quarter 2014 Financial Results,” LRAD Corporation web site, August 7, 2014; www.lradx.com/site/content/view/2210/55/.)
The company’s fourth quarter started strongly and management believes it will end the year achieving one of its strongest financial performances from both a top- and bottom-line standpoint.