In a slow-growth world, a lot of the top micro-cap stocks are—unsurprisingly—the current winners. Institutional investors rallied around the fastest growing companies. And valuations are rich—simply because there are so few of these companies around. Double-digit growth is a tough thing to come by these days.
So, speculators now are to a large extent dealing with momentum plays. Cybersecurity companies are some of the market’s more prolific momentum stocks currently. Not to be excluded are restaurant stocks.
Top Micro-Cap Stocks as Strong Momentum Plays
The problem with momentum stocks is that when they reverse, they usually do so with fervor. The broader market is not looking that healthy these days. Stocks are tired and global economic data isn’t robust. It’s the lull between earnings seasons and also the time of year when stocks often retreat due to a lack of investor interest.
But there are still growing businesses out there and I see two specific companies as examples of stocks able to keep both their operating momentum and share price momentum intact going into 2016.
The stocks I’m talking about are Fortinet Inc. (NASDAQ/FTNT) and Zoe’s Kitchen, Inc. (NYSE/ZOES).
Two Companies on the Path to Growth
Fortinet Inc. (NASDAQ/FTNT)
Naturally, every time there’s a big data breach at a government agency or a big corporation, the cybersecurity sector accelerates on the stock market. They’re not for the faint of heart and are certainly overpriced, but cybersecurity stocks are some of the best performers over the last 18 months.
Fortinet Inc. is a technology company selling anti-spam, anti-malware, firewall, and Web filtering software and services to both corporate and government customers. The company has earned a lot of patents and is basically a revenue growth story as management ploughs money into continued development.
This stock was flat for several years; it has only recently accelerated steadily in price on the stock market. I think it has further momentum. This position is, of course, astronomically priced considering its earnings.
Zoe’s Kitchen, Inc. (NYSE/ZOES)
Also interesting for risk-capital investors is Zoe’s Kitchen, Inc., which is a restaurant stock we’ve considered before in these pages. This is a developing concept, but the vast majority of locations are company-owned; which I really like for new restaurant businesses.
Zoe’s first quarter of 2015 beat the Street with solid top-line revenue growth of 36% to $63.0 million.
Similar to Fortinet, the company isn’t making a lot of money on its operations, because it’s still in full development mode.
Management opened 12 new restaurants in the first quarter and hopes for 31 to 33 new openings this year.
It’s All About the Existing Winners Now
Technology and restaurants are two industry sectors that perpetually offer good speculative opportunities. It’s all for risk capital, mind you; you don’t want to bet the farm on stocks trading at crazy valuations on little earnings.
But in this market—a market that’s already gone up in a slow growth world—I believe institutional investors will keep buying existing winners. Existing momentum stocks have a greater likelihood of staying on trend as long as the underlying businesses please the Street.