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3 Micro-Cap Stocks With Triple-Digit Upside

Wednesday, February 05, 2014 2:30 PM

Over the past few weeks, I've been chatting with my colleague and StreetAuthority's Managing Editor, Bob Bogda, about the potential for home run stocks. These are the kinds that can deliver gains in one year that many other stocks take a decade to achieve.

No area is as ripe for such upside as micro-cap stocks, which typically have market caps between $50 million and $200 million. Micro-caps tend to toil in anonymity -- right up until the time they deliver great news. Caught off guard, investors can push such stocks up by 50% or even 100%.

Of course, with such potential reward comes risk. Micro-caps can also shed value at a rapid pace, especially if the market loses steam. Case in point: I suggested back in September that Merge Healthcare (Nasdaq: MRGE) could double in value, but MRGE has fallen 27% since then. I still think Merge is an intriguing health care opportunity, but clearly my enthusiasm was premature.

That's why you need to take a basket approach to micro-caps. Placing too many funds in just one micro-cap stock is too risky. The other two stocks in that September article bear out that premise: Novavax (Nasdaq: NVAX) is up 77% since my profile, and Lionbridge Technologies (Nasdaq: LIOX) is up 86%. If you invested $3,000 in each of those three stocks at that time, you'd be sitting on a tidy 45% gain.

All three of these stocks still hold great promise, for the reasons I outlined back in September, and also suggest investors check out the following three micro-cap stocks, all of which have triple-digit upside.

1. I.D. Systems (Nasdaq: IDSY)​
This company was an early adopter of wireless technology, helping the U.S. Postal Service, Ford (NYSE: F), Wal-Mart (NYSE: WMT) and others remotely manage their fleets of mobile warehouse equipment such as forklifts. Investors had big hopes for the company, briefly pushing shares above $20. These days, shares toil below $6. Those three just-noted customers failed to deliver the higher level of orders that investors had expected, and annual sales eventually slumped to just $10 million in 2009.

Thanks in part to a savvy acquisition of GE's fleet tracking division in early 2010, sales trends have slowly been on the mend. Revenue hit $25 million in 2010 and $45 million by 2012, and though they likely dropped a bit in 2013 (fourth-quarter results have not been announced), sales growth should exceed 25% in 2014, according to consensus forecasts. Equally important, those should be profitable revenues. Analysts anticipate earnings per share (EPS) of around $0.40.

A key catalyst for this stock: a current agreement with Avis Budget Group (NYSE: CAR) that has the potential to greatly expand in scope. Beyond that opportunity, the company appears to be landing new customers at a fast pace: In a call with analysts, CEO Jeff Jagid said: "In the third quarter of 2013, we received initial purchase orders from a diverse range of new enterprise customers, representing additional opportunities for growth, including one of the world's largest industrial manufacturers, one of the world's largest tobacco companies, a leading North American packaging manufacturer, a major U.S. dairy products producer, an international specialty logistics company, and the U.S. Defense Logistics Agency."

The key for this still-lagging stock is for I.D. Systems to deliver consistent quarterly results. If that happens, and management can make a clear case for solid top-line growth in subsequent years, then shares will start to garner a higher multiple. Applying a forward price-to-earnings (P/E) multiple of 30 to expected 2014 earnings per share would push this stock to $12, more than 100% above current levels. Why should such a high multiple be warranted? Because this business has stable fixed costs, and higher revenues in the future would help boost profits at an especially fast rate.

2. Derma Sciences (Nasdaq: DSCI)​
This micro-cap has built a healthy business in the wound care market, selling ointment-laced bandages that help to speed healing. Sales have grown from $48 million in 2009 to $72 million in 2012, and should exceed $90 million this year, according to management.

Unfortunately, thought that core business has been nicely profitable, Derma Sciences is spending heavily to develop a potentially game-changing wound-healing drug known as DSC-127, leading to overall losses instead of profits. The drug development process is so costly that the company recently found it necessary to dilute shareholders by raising more than $80 million in fresh capital. The good news: Some of those funds will also be used to expand a sales force that is focused on existing products and to give Derma the resources to make acquisitions.

The real catalyst here is DSC-127, which will require some patience. Phase III clinical trials won't be fully enrolled for another 12 months, and trial data won't likely be released until the second half of 2015. Still, with ample cash on hand, and further intra-trial updates, this stock is likely to land on many more investor radars this year. And the ultimate value for this company may exceed $750 million if DSC-127 is a hit, representing more than 100% upside. Look for an update from management in mid-March.

3. Capstone Turbine (Nasdaq: CPST)​
Roughly a decade ago, this company was expected to revolutionize the power-generation industry. Its micro-turbines promised a great deal of flexibility for onsite power in remote areas, and could also serve as a backup source in the event of blackouts. Capstone's promise was never fulfilled, and shares eventually lost more than 95% of their value as the company kept selling shares to stay afloat.

Yet in recent years, Capstone has begun to fulfill its promise. Sales finally reached the $100 million mark in fiscal 2012, long after investors had initially expected such a revenue base. Yet analysts now see revenues reaching $175 million in the fiscal year that begins in April. Equally important, after a string of losses, Capstone is expected to reach break-even in fiscal 2015.

Shares have moved up off of their lows in recent quarters, though further sales momentum -- in the form of new contracts -- can send this stock toward the $3 mark, representing almost 100% upside. That $3 price represents a multiple of five times projected fiscal 2015 sales.

Risks to Consider: Micro-caps have been one of the clear beneficiaries of the current bull market, and any downward move in the broader market is likely to lead investors towards larger, safer stocks.

Action to Take --> These companies are all boosting sales at a solid pace and aim to fulfill unmet needs in their market niches. That also makes them solid buyout candidates, but even without an acquisition, they're solid candidates for the growth-oriented portion of your portfolio.

P.S. Little-known stocks with game-changing potential and huge upside are a favorite of Andy Obermueller, Chief Investing Strategist for StreetAuthority's Game-Changing Stocks advisory. His latest report, "The Top 5 Game-Changers of Tomorrow," dives into a handful of trends with the potential to revolutionize the way we live -- and make early investors a killing. To learn more, click here now.

David Sterman does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.