Typically, small caps are any public company with a market capitalization between $300 million and $2 billion. These numbers may seem huge when related to everyday life, but in the stock market, they are indeed small.
You can even find smaller companies with market caps less than $300 million, known as micro-cap stocks. Then we have nano caps or "penny stocks," which are often companies with market caps of less than $50 million.
While micro- and nano-cap stocks are simply too volatile and risky for the average investor, small caps are the perfect size to create outstanding profit opportunities. These smaller stocks often exhibit more volatility than their larger brethren, yet generally have enough traction in the marketplace to weather downturns. In addition, some small caps pay huge dividend yields. So if you combine the yield with their potential upside, then dividend-paying small caps can truly be the perfect tool for supercharging your portfolio.
A high-yield niche player
Crosstex Energy L.P. (Nasdaq: XTEX) is considered a midstream natural gas partnership that manages 3,300 miles of pipeline, three fractionators and nine processing plants. It currently handles about 6% of the marketed daily domestic consumption in the United States.
In other words, this small cap stock is a substantial player in its niche.
Natural gas prices have bounced off their April lows, building an ascending triple bottom and pushing above the 50-week simple moving average to just under $4.
A continuation of this uptrend bodes well for Crosstex. This stock currently yields 8.5% and has paid dividends since 2003, which makes it a prime small-cap holding for your portfolio.
But the stock recently ended its rally that started Sept. 11. While its price has broken through the 200-day simple moving average, it is still technically supported by the 50-day moving average in the $15.20 range. As long as its price is supported by the 50-day simple moving average, a solid entry-level is still present.
A phenomenal yielder that's benefiting from the drought
Another small cap worth every investor's attention is a high-yielder that also has a relationship with natural gas. Rentech Nitrogen Partners (NYSE: RNF) produces nitrogen-based crop fertilizer from natural gas and other industrial production. Therefore, if natural gas prices increase, then Rentech's costs also increase, potentially hurting the company's bottom line.
But despite the firming of natural gas prices, Rentech's stock price more than doubled from June through mid-September this year. This was supported by a solid fundamental reason. This year's drought resulted in an increased demand for nitrogen-based fertilizer, which helped the stock's upward movement.
The stock currently yields an impressive 13.5%, making it a strong candidate for any portfolio.
If you take a look at the technical picture, then you'll see the price has fallen from the $40 highs. It has found support at the 50-day simple moving average in the $35 range, creating the perfect value "buy" zone opportunity.
Risks to Consider: Small caps are inherently riskier than large-cap stocks. This is due to their potentially greater volatility. Both of the stocks I mentioned in this article are connected to the natural gas business, albeit in an inverse manner. Therefore, commodity price risk overhangs both investments. But it is within these risks where opportunity is found. Always remember to use stops and position size properly when investing.
Action to Take --> Both stocks are great buys right now for fundamental and technical reasons. Investing in the two stocks may help mitigate the commodity risk due to the inverse relationship that may be created should natural gas spike one way or another. Regardless, these two stocks have killer yields and may just be the supercharging your portfolio needs.