You've Got to Check out These 3 Sleeper Stocks
In yesterday's letter, Making the Microcap Index Adds Cache, I wrote that "Several of the companies that have been selected to join the [Russell] microcap index have the potential to make significant gains over the second half of this year - but just making the index alone doesn't guarantee share price appreciation. The companies need to perform - and we only want to get in on the best ones."
Today I'm introducing you to three of the best. These are three tiny companies that have to potential for eye popping gains. Of course, they are risky investments as well simply because of their miniscule size - but it's much more likely that a sub-$100 million market cap company will triple, or more, in size than a company worth $5 billion.
From yesterday's article:
"I came across three sleeper stocks that you should put on your radar right now. What do I mean by sleeper stocks? Those that don't have super compelling business descriptions - the kind of companies that you begin to read about only to find that you've slipped off the couch and into a deep sleep on the floor.
But these companies are waking up to prospects of future growth - so get vertical again and let's take a quick look at the under-appreciated industries these companies are in."
I introduced you to the Packing & Container and Chemicals industries yesterday, so let's move right on to the stocks today.
Sleeper Stock #1: Northern Technologies International Corporation (Nasdaq: NTIC)
Northern Technology International Corporation makes protective coatings and eco-friendly polymer resin compounds. It's a tiny company, the market cap is only $42 million, and it trades on very thin volume of only around 2,000 shares a day - so be aware that share price volatility is the norm. Despite its tiny size, the company has international exposure - in the last quarter 20 percent of sales came from outside of the U.S.
Northern Technology's stock price has been strong over the last year. After hitting a low of $5 last June it has risen nearly 100% to close at $9.85 yesterday. The stock is trading in a nice upward channel, and has recently pulled back to a level that suggests now is a great time to buy.
Analysts are forecasting strong earnings growth of 156 percent this year and 70 percent in 2011. And I'm not talking just pennies in earnings either like many micro-caps report - Northern Tech is expected to earn $0.50 per share this year. What's more, income growth isn't just about cutting costs. Revenue growth is projected to be 42 percent this year, and 36 percent in 2011.
The company has no long-term debt, but also doesn't have a ton of cash on hand - so cash flow is absolutely critical. With a forward PE of just 11.6 and a PEG ratio of .79, Northern Technologies is a sleeper stock worth your attention if you can handle the nightmarish liquidity.
Sleeper Stock #2: UFP Technologies, Inc. (Nasdaq: UFPT)
Headquartered in Georgetown, Massachusetts, UFP Technologies turns plastics and specialty foams into component parts for automobiles, medical devices, electronics and a host of other items. It also makes everything from abrasive nail files to shock absorbing inserts for footwear.
While these products might not make you jump out of your seat, you should be excited by the fact that the stock has risen 120 percent over the last year. From a technical perspective I'm looking for the stock to regain $10 to signal strength. We need to be wary of a break below $8.50 as a sign the stock could fall apart - if it does expect it to return to the March pre-breakout level below $8.00.
Analysts expect revenue and earnings to grow over the next two years and if the company meets expectations the stock should continue its ascent to higher highs. Analysts are calling for earnings per share to grow by 12 percent to $1.05 this year and for revenue to increase by 18 percent to $117 million.
The $56 million market cap company has more than twice as much cash as long-term debt, $17 million vs. $7.3 million, and continues to increase cash reserves on a quarterly basis. This should help it capitalize on investment opportunities in the near future. A dirt cheap forward PE of 7.9 indicates this sleeper stock has plenty of room to run over the next two quarters.
Sleeper Stock #3: TPC Group, Inc. (Nasdaq: TPCG)
TPC Group supplies chemical and petroleum companies around the world with C4 processing products. Think fuel additives, and chemicals to make rubber products, detergents, caulks, and lubricants. The company's market cap of nearly $300 million is larger than those of Northern Tech and UFP, but average volume is still low - just over 40,000 shares trade on an average day.
This stock has absolutely crushed index averages over the last year after rising from $3.95 to yesterday's closing price of $16.85 - a nearly 400 percent surge.
On May 14, 2010 TPC Group announced revenue of $400 million for the third quarter of fiscal 2010, up 146 percent from $163 million in the third quarter of last year. The outlook for the company over the next few years looks bright as analysts expect strong demand for its products. Look for TPC Group to grow EPS to $1.77 in 2011, an increase of 110 percent over $0.84 expectations for this year. With strong earnings growth and a forward PE of only 9, it's hard to find a reason not to own this stock.
***These three sleeper stocks aren't going to wow the crowd at your next cocktail party - but frankly who cares. They all have positive momentum moving into the second half of 2010, and their recent inclusion in the Russell microcap index will only help increase their exposure to Wall Street.
Check them out and consider if they are right for your portfolio. If they are, you can keep them to yourself and enjoy the fact that you're investing in stocks that make big returns - not just those that make for great conversation.
I recently published a special report featuring three stocks that made the Russell Small Cap Index. These are three more great ideas for stocks you should check out, and the report includes a full analysis, including price targets, for these new stocks. To get your copy of my Special Report: Three Small Cap Additions for The Russell Small Cap Index, click here.
