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Navellier Growth

Three Small-Caps Trading for a Bargain

May 31, 2012

Stock of the Day

On Tuesday, I talked about blue chip stocks, so today I'm going to cover their more aggressive counterparts, small-cap stocks.

Over the last 5 years, I've locked up more triple-digit winning trades in small-cap stocks than in any other kind of stock—a total of 17 in my Emerging Growth service—which is more than double the amount of triple-digit wins in my other services.

I often say that we hit a lot of singles and doubles in blue chip stocks, but we hit a lot more home runs in small-cap stocks.

So what makes the small-caps we buy so special? Well, these stocks have three distinct advantages:

1. They are innovators. Small companies thrive by bringing breakthrough and/or niche products to market—quickly. In fact, without the benefit of a big brand name monopoly, many even depend on it.

2. They are nimble. When times get tough, they don't have a lot of overhead to weigh them down and when demand ramps up, they can more readily add workers and capacity.

3. They move like bunnies. This last one is tough for some investors to take, but there's no denying that small-caps sit and then hop…sit and then hop. So, when you buy small caps with superior fundamentals, it's like spring-loading your portfolio. It doesn't always happen overnight, but when these stocks do take off—they REALLY take off (remember, my 17 triple-digit winners is proof positive of this!).

Smaller stocks are going to add the turbo-power you need to keep your portfolio growing at a healthy clip—but not just any small cap stock will do. Here's a list of my recommended three small-cap stocks to buy (all bargains at under $25 a share) and five small-caps to avoid:

3 STOCKS TO BUY

5 STOCKS TO AVOID

Allot Communications (ALLT)

GeoEye Inc. (GEOY)

InfoSpace Inc. (INSP)

MAP Pharmaceuticals Inc. (MAPP)

Santarus Inc. (SNTS)

RF Micro Devices Inc. (RFMD)

 

Riverbed Technology Inc. (RVBD)

 

Zale Corp. (ZLC)

Buy Only the Best

I recommend all three of these buys in my Emerging Growth small-cap service. To make it on our Buy List a stock must have three things: 1) a market cap in the range of $2 billion to $10 billion, 2) a minimum of rate of 25% sales growth and 3) at least a rate of 50% earnings growth.

Let's talk specifically about InfoSpace Inc. (INSP). It's a small Internet search provider with a unique technology that essentially searches all of the major search engines—including Google, Yahoo and Bing—and then compiles the most comprehensive results.

Sounds cool, but is there any money to be made? Yes—gobs of it, in fact.

In May, the company reported first-quarter results and compared with last year, net income soared 777% to $11.4 million. Adjusted earnings weighed in at $0.70 per share, which positively trounced the $0.25 per share consensus earnings estimate by 180%. Over the same period, revenues more than doubled to $115.7 million, up from $51.7 million and forward expectations are solid. Shares shot up 20% on the announcement proving that small cap stocks get a quick "hop" from strong earnings. Allot Communications and Santaurus Inc. posted similarly stunning operating results for the first quarter as well.

How to Add These to Your Portfolio

Because of the aggressive nature of these stocks, if you're a conservative investor, I recommend that small-caps make up about 10% of the four horsemen stocks in your portfolio. If you're particularly aggressive, you could go in for a 20% allocation. Just remember that if you're looking for a smooth ride to profits, you'll need to counter these aggressive small-caps with the right blue chip stocks. (So if you missed Tuesday's list of blue chips, now is a great time to get caught up.)

We'll talk more about these allocations once we cover the remaining two horsemen, global growth stocks and super-high-alpha stocks, on Tuesday.

In the meantime, now is the perfect time to pick up these under $25 small-cap stocks—while the market is putting them on sale!

Sincerely,

Louis Navellier

Louis Navellier

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