5 Small Caps to Juice Your Portfolio

This article is part of our Rising Star Portfolios series.

When last we chatted, before the holidays slowed things down, we were screening for great small caps. Today, we'll take a closer look at our candidates and narrow the field.

But first ...
It's been a month since I bought a half-position in Coca-Cola (NYSE: KO  ) , and today I'm going to finish the bottle and down the other half. That will give us about $1,000 worth of the sugar-water king, or roughly 5% of my $17,000 portfolio. Splitting up the buy will have little effect on the port, but I wanted to introduce the practice early on. I'll be using the technique more, especially with smaller and more volatile companies.

As a refresher, here's what I'm aiming for, allocation-wise:

Large Caps

45%

Mid Caps

15%

Small Caps

15%

International

25%

We have a lot more large-cap buying to do, so we'll eventually return to the "Corporate El Dorado" screen that led me to Coke.

Small-cap roundup
After rerunning the Foolish 8 and Modified Foolish 8 screens and eliminating some companies without significant competitive advantages, I'm left with five solid candidates for our small-cap buy.

Company 

Market Cap (millions)

Insider Ownership

Forward P/E

ROE

Net Margin

lululemon athletica (Nasdaq: LULU  )

$4,891

33%

48.1

37%

15%

Ebix (Nasdaq: EBIX  )

$861

14%

17.2

33%

43%

MercadoLibre (Nasdaq: MELI  )

$3,041

13%

54.7

37%

25%

Puda Coal (NYSE: PUDA  )

$351

33%

10.4

20%

7%

ZAGG (Nasdaq: ZAGG  )

$176

32%

21.5

39%

12%

Source: Capital IQ, a division of Standard & Poor's.

Let's take a quick look at the strengths of each.

lululemon
This retailer designs "technical athletic apparel," mostly geared toward yoga-loving women -- although there's increasing focus on menswear. Management employs a vertical strategy, meaning it controls most everything from design to sale. It's growing like gangbusters, and the big payoff for investors would come about if lululemon becomes the next great athletic brand.

Ebix
Ebix is the hidden engine that helps much of the insurance industry function efficiently. It provides software and e-commerce products that streamline processes for brokers, carriers, underwriters, and reinsurers. This is a very acquisitive company, and management is assembling a powerful network that's hard for competitors to match.

MercadoLibre
Let's all say it together: "MercadoLibre is the eBay of Latin America." Like eBay (Nasdaq: EBAY  ) (and Ebix above) the online auction star gets big benefits from the network effect. That effect is so powerful that not even eBay could knock it off its perch in that area of the world, and instead bought up about 18% of MercadoLibre.

Puda Coal
Puda provides premium grade cleaned coking coal that's used by steel producers. The difference is this all happens in China, which, as everyone knows, is experiencing the greatest growth spurt since Yao Ming hit fifth grade. This gives it a great location advantage because it's able to supply the region at a lower cost than outside competitors. Puda has attractive multiples, good returns on equity, a solid balance sheet, and lots of room to grown.

ZAGG
As interesting as its name, ZAGG makes stuff for consumer electronic devices. Think headphones, speakers, and protective screens for iPods and cell phones. But the real story is its small size combined with red-hot growth: Revenue and income are up 70% and 60%, respectively, over the past 12 months.

Foolish bottom line
None of these would be considered undervalued by traditional measures, but that's by choice. The Foolish 8 screens produce stocks that have already been validated by the market, which is a fancy way of saying they've run up quite a bit in recent months. But the screens' performances speak for themselves, and I'm confident there are winners in this bunch.

I still have some research to do in order to come up with the right choice for our multivitamin portfolio, and I'll reveal the results next week. Stay in touch by following me on Twitter and by checking in with the multivitamin discussion board.

This article is part of our Rising Star Portfolios series, where we give some of our most promising stock analysts cold, hard cash to manage on the Fool's behalf. We'd like you to track our performance and benefit from these real-money, real-time free stock picks. See all of our Rising Star analysts (and their portfolios).

Fool analyst Rex Moore is known as the eBay of Silverspring Drive. Of the companies mentioned, he owns shares of eBay. MercadoLibre is a Motley Fool Big Short short-sale pick. Coca-Cola is a Motley Fool Inside Value selection. Ebix, lululemon athletica, and MercadoLibre are Motley Fool Rule Breakers picks. eBay is a Motley Fool Stock Advisor choice. Coca-Cola is a Motley Fool Global Gains selection. Coca-Cola is a Motley Fool Income Investor pick. Motley Fool Alpha has opened a short position on MercadoLibre. Motley Fool Options has recommended a bull call spread position on eBay. The Fool owns shares of Coca-Cola and Ebix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (1) | Recommend This Article (15)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 31, 2010, at 7:19 PM, StockMillionare wrote:

    Out of all of the stocks you mention I believe lulu, ebix and especially zagg have the most potential. A couple things to add about zagg:Institutions only own about 8 percent. I see this as an advantage over some of the other stocks which are heavily owned by Institutions. The reason I like zagg only having 8 percent institutional ownership is that it means it has plenty of room to grow. If the stock continues on it's path of great earnings institutions will take notice and the percentage that own the stock will rise. Thus increasing the share price at a rapid pace. It's similiar to what Peter Lynch believes in. He mentions that you should try and pick up a good stock before the big boys jump on, he advocated doing this buying not buying a stock with over 20 percent institutional ownership. When you think about it makes rational sense. And who am I or most investors for that matter to argue with the great Peter Lynch, one of the best investors ever.

    If someone thinks it can't be done that way, well I am here to tell you that it can. This is how I picked the stock Trimas Corp (trs). It had good fundamentals, strong earnings, profit margine etc. It had good inside ownership and a reasonable growth story. And the key, it had under 20 percent institutional ownership at the time. It has since gone to almost double since I picked it.

    Back to zagg;good insider ownership, low instituional ownership, and great earnings.

    On 11/9/2010, ZAGG reported 3rd quarter 2010 earnings of $0.16 per share. This result beat the $0.13 consensus of the 3 analysts covering the company and beat last year's 3rd quarter results by 300.0%. The next tentative earnings announcement is expected on 03/14/2011. The growth story is also a compelling one.

    Technicals: Zagg made it's high on Decemeber 13, 2010 at $9.18. It has since retraced which is normal for a stock that has shown high relative strength. If it moves back up over it's ten moving average on stronger than normal volume that would be your buy point.

Add your comment.

DocumentId: 1413795, ~/Articles/ArticleHandler.aspx, 4/20/2014 4:58:19 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement