Three Small RFID Stocks

This may or may not be the first time you hear about RFID -- or radio frequency identification. This will definitely not be the last time. Last week we went over the nuts and bolts of the tracking technology and why it will matter come January thanks to certain government and retailer initiatives. We also covered some of the interesting companies in the business of printing RFID tags. There's no point in repeating ourselves here. Just one simple click can take you back to last week to get you up to speed.

Go ahead. I'll still be here when you're done.

See? I told you that I would still be here.

But naturally there are many opportunities beyond printing RFID tags. While Hewlett-Packard (NYSE: HPQ  ) is devoting $150 million over the next five years to develop its RFID presence, a smart move given its strength in the printing industry, there are many other companies looking for their slice of the RFID pie. From the server and database giants that will do brisk business as RFID ups the breadth of information storage and processing to the retail chains that will benefit from the inventory control wonders of supply chain management, there are a lot of blue chips that are bound to get chipper and bellwethers worth polishing by the time the RFID revolution blazes through.

So let's take a closer look this week at three companies in this booming space that are small enough -- each one commands less than $250 million in market cap -- that the RFID platform can truly elevate their game by applying the technology in promising and potentially lucrative ways.

Digital Angel (AMEX: DOC  ) -- While this stock has had a good run since the FDA approved the use of the company's VeriChip RFID device in humans back in October, Digital Angel is already carving out a living by inserting chips in animals. From tracking pets and Canadian cattle to helping the U.S. eradicate wildlife diseases by tagging the captive deer and elk population, Digital Angel has been pawing, clawing, and hoofing its way to a stronger top line over the past few years and its losses have been narrowing sequentially.

Yes, losses. But the fact that the company has generated just over $40 million in sales over the past four quarters in a growing field is commendable, even if it means that its shares aren't exactly a bargain-fetching five times the company's trailing revenues. Yet it's also not an outlandish sum. And that's before we consider the open-ended potential of the VeriChip that it has licensed to its parent, Applied Digital (Nasdaq: ADSX  ) , for human applications. While that opens up a can of logistical worms -- or at the very least a frightening sci-fi reality where we can be tracked down outside of Orwellian fiction -- there are medical and security advantages to help counter the privacy concerns that come with the VeriChip.

Click Commerce (Nasdaq: CKCM  ) -- When I mentioned that I would be writing about RFID, I received a fair amount of email from readers suggesting public companies to look into. That's the beauty of the Internet when it comes to generating stock ideas. Yet by the time I got the fourth email whispering Click Commerce, I pretty much had this all figured out. Surely this was one of those penny stock hype deals where folks on some speculative message board were pimping out my email address to see if I would bite the rusty hook. The fact that the only time we had written about this enterprise software company on our site was 21 months ago when we warned about buying into damaged companies that announce reverse stock splits pretty much iced my conspiracy theory cake.

My first impressions confirmed my initial trepidation. The stock had more than doubled over the past two months. Yes, revenues were up by 40% this past quarter, though that was padded by recent acquisitions. In fact, earnings for the period were down even before you factored in the spike in shares outstanding due to the company's buying spree (dropping earnings per share even further). But this wasn't a penny stock, and looking under the hood revealed a company in decent shape with a clean balance sheet sporting more than a buck a share in cash. Five straight quarters of profitability now find the company trading for a little more than 20 times trailing earnings, and the RFID kicker lies in its summer purchase of bTrade.

As a data synchronization specialist, bTrade had already been tapped by Home Depot (NYSE: HD  ) to gets its suppliers in line with RFID. As a recognized source and recipient data pool since coming under Click Commerce's wings, it now stands to land even more juicy retail accounts as they migrate over to the superior RFID standard. With a market cap just over the $100 million mark, the company has ample room to appreciate if it ultimately plays a larger role in the RFID rollout -- and to make us forget all about that reverse stock split.

Gaming Partners (Nasdaq: GPIC  ) -- While folks already know that they are under camera surveillance in Las Vegas, many do not realize that some of the casino chips also know what you're up to in Sin City.

Chips with chips? That's right. Embedding RFID microchips in casino chips has many practical applications. From immediate inventory tallies to making sure that chips don't walk out or bogus chips aren't brought in, casinos can keep gambling as honest as you can when you are dealing with folks who have mastered poker faces. Through the first nine months of the year the company has reported earnings of $0.18 a share on a 30% uptick in revenues.

While table game and card shuffling giant Shuffle Master (Nasdaq: SHFL  ) recently acquired the patent behind Gaming Partners' microchip technology, the company retained exclusive stateside rights to its effective casino chips. With casinos springing up just about everywhere and the logical convenience and security advantages of Gaming Partners' smart chips, why bet against the house?

RFID isn't just a gamble. It's real, and the stakes are high. Identifying worthy players in disruptive technologies is what our Rule Breakers newsletter aims to achieve. And yes, there is still time to sign up for a free trial.

Where will tracking and supply chain management technology go from here? What are some of the other public companies looking to make a mint in RFID? All this and more -- in the RFID discussion board. Only on Fool.com.

Longtime Fool contributor Rick Munarriz wants to slap a passive RFID tag on the future so he will always know where to find it. He does not own shares in any of the companies mentioned in this story. He is a member of theRule Breakersanalytical team, seeking out tomorrow's great growth stocks today.


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