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Four Micro Caps Making Their Mark



July 23, 2010 – Comments (1)

OK, I admit it. I love micro caps. I just love learning about these little companies. Maybe it’s the fact that they are facing such an uphill battle. Maybe it’s the fact that they have so much room to grow. Whatever it is, one thing is for sure: Finding a couple of winners in the land of the small can have a dramatic effect on your portfolio. Of course the opposite is true as well. Drop your coin on a bunch of losers and you could be looking at the big ole goose egg. A donut. I’m talking permanent loss of capital. So what is the best way to approach micro caps? And how can we maximize our exposure while minimizing risk? Well Fools, you can do what I do and build your own little micro cap basket. Here are a few ideas to get you started.

Looking for a small company with a big vision? Look no further than Diamond Hill Investment Group (Nasdaq: DHIL). Diamond Hill is a registered investment adviser with $6.5 billion in assets under management. The company takes pride in their bottom-up investment process where they analyze the fundamentals of their prospects, estimate intrinsic value, and then monitor their positions and portfolios. Their stated mission is to take a long-term perspective while aligning their interests with those of their clients, and their investment strategy is rooted in the teachings of Benjamin Graham and Warren Buffet (you may have heard of them). With a five year average return on assets of 18% and a stock trading at just about 10 times free cash flow, Diamond Hill can add sparkle to any micro cap basket.

Todd Shipyards Corporation (NYSE: TOD) is the largest private shipyard in the Pacific Northwest focusing its efforts on ship repair and construction. That some of the company’s biggest customers include the U.S Navy and the Coast Guard offers the potential for some real long-term revenue streams considering their market position in that part of the country. Of course any company that relies solely on government spending is a risky play, especially in times like these where government spending has gotten “slightly” out of control. However the counter to this is that cutting government spending is easy to preach but much tougher to do, and these are ships we are talking about. It isn’t like they are going to just cut these out of the budget and let ‘em rust away. And what’s more, if governments actually do rein in spending, they are even more likely to repair older ships as opposed to building new ones, so all the better for Todd. With a clean balance sheet and a stock at 10.5 times free cash flow, Todd Shipyards may be worth a gander.

There’s no question that eMagin Corp (AMEX: EMAN) has the coolest technology of the bunch here. This mighty micro cap based out of Washington develops and produces organic light emitting diode (OLED) technology. This is important to you is because it’s technology that is used for products ranging from military applications like 3D training and simulation and enhanced vision products (defense) to your top of the line high-def video products that are taking over the market (consumer). The company’s advantage lies in their version of OLED technology known as AMOLED (active matrix OLED). This offers the option of building directly into the computer silicon chip which ultimately results in more compact and integrated systems and products. Pretty sweet right? Just look at it this way: The next time you need a pair of light weight night-vision goggles, eMagin is your company. Add to that a debt-free balance sheet and top line compound annual revenue growth of 45% over the last five years, and eMagin might be seeing something big.

US Home Systems (Nasdaq: USHS) is a company that has kept my interest for some time, all the way back to before the recession and subsequent bottom falling out of the housing market. Therein lies part of the problem I guess you might say. US Home Systems is dependent on said housing market, at least in some capacity. The company specializes in home improvement projects ranging from kitchen and bathroom renovations to garage and storage solutions. Thankfully the company has been well-managed through the downturn, and their ongoing relationship with Home Depot (NYSE: HD) gives them valuable exposure on a national basis covering 42 major markets in 27 states. I like the company’s chances once housing turns, but it’s anyone’s guess as to when that will be. Nevertheless, they have $4.3 million net cash on the balance sheet and management continues to buy back shares, so it looks like they too may see some value in this little house.

Of course these are ideas to be further researched and not formal recommendations. The biggest market cap of these four companies is still only $145 million, and micro caps tend to trade pretty lightly, so you should always set a limit order when buying and selling. However I do believe that many of the greatest stories are still waiting to be fully told, and a nice basket of micro caps can offer plenty of profitable tales.

1 Comments – Post Your Own

#1) On July 23, 2010 at 2:19 PM, coveman100 (61.18) wrote:

eMagin has nowhere to go but up over the next 2-3 years.  they have no competition to speak of for OLED display screens smaller that 2" x2" which is what the Dept. of Defense is looking for and will be what many gaming and smartphone manufacturers will be looking for.

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