Can You Amass a Fortune With These Stocks?

You don't need the investing acumen of Warren Buffett or the riches of a trust fund baby to achieve financial success.

Small sums of money invested monthly in undervalued small-cap stocks offer hope for your greatest returns. They offer the best growth opportunities for growth because they're mostly ignored by the big investors.

Below we screen for stocks under $3 billion in market cap, offering earnings surprises of 15% or more in the previous quarter, with long-term earnings growth forecast to be at least 15%. We'll then filter our findings through the collective investing wisdom of the 170,000 members in our Motley Fool CAPS community.

Here are some of the stocks this simple screen found:

Company

Market Cap

EPS Actual vs. Estimate

Avg. Analyst 5-Year 
EPS Estimate

CAPS Rating 
(out of 5)

Ebix
(Nasdaq: EBIX  )

$784 million

$0.41 vs. $0.33

15%

****

Limelight Networks
(Nasdaq: LLNW  )

$622 million

($0.03) vs. ($0.05)

17%

***

ZAGG
(Nasdaq: ZAGG  )

$218 million

$0.13 vs. $0.10

26%

*

Source: Yahoo.com and Motley Fool CAPS.

Of course, this is not a list of stocks to buy -- just a starting point for more research. We need to look more closely at these companies to see whether analysts' faith in them is well-founded.

An alternative opportunity
Former Fed chairman Alan Greenspan gave us "irrational exuberance," is insurance software provider Ebix providing us an example of "reasonable apathy?"

Despite turning in a quarterly earnings report that not only just beat analyst expectations for revenues but handily exceeded their profit forecasts, the stock still plunged. What's obviously causing consternation for investors is the allegation of impropriety leveled a few months back. Even though management rebutted them, the stink of scandal still hangs thick. Investors are obviously taking a wait and see attitude.

Considering the recent strong performance by Ebix peer Amdocs and higher revenues and profits at JDA Software (Nasdaq: JDAS  ) , the insurance software maker's own results are not out of the ordinary. At around 13 times forward earnings estimates, it seems very cheap based on growth expectations, much more inexpensive than either JDA or Amdocs. Computer Sciences is comparatively priced, but its results are a lot more circumspect.

There's certainly a risk factor priced into Ebix's shares, but considering the Rule Breakers recommendation is able to maintain good results amid accusations of fraud -- many of these fraud stocks suddenly suspend earnings, restate financials, and otherwise hunker down after an allegation surfaces -- I'm willing to believe there was more smoke than fire in these charges.

Even if its CAPS rating took a slight hit in all this, 97% of the more nearly 1,400 members still think it will outperform the market. Follow this stock by adding it to your watchlist, then head over on the Ebix CAPS page and tell us your views on the charges hanging over it.

Faster, faster!
The ability to deliver content efficiently was what allowed Limelight Networks to beat out Akamai Technologies for a good portion of Netflix's (Nasdaq: NFLX  ) business, along with Level 3 Communications. When you're hogging as much bandwidth as Netflix apparently has been, you need to have the most efficient operators handling your content.

Of course, Akamai isn't content to let others eat its lunch, and is teaming up with Riverbed Technology (Nasdaq: RVBD  ) to accelerate its content delivery capabilities. But Limelight's not standing still either, and it recently acquired AcceloWeb to help speed up the presentation of web sites and applications. This focus on speed plays to its strengths, and allowed it to raise guidance this month noting the convergence of three trends: the popularity of online video, the wide adoption of mobile devices, and the development of cloud computing as a major force for the future.

Some 91% of the 330 CAPS members rating Limelight see it beating the Street going forward, but add it to the Fool's free portfolio tracker to keep an eye on how fast it can get there.

Man the ramparts
It looks like ZAGG saw the writing on the wall when Apple came out with its iPad Smart Cover and nearly killed the market it had developed for the InvisibleSHIELD. It's now partnering with Logitech (Nasdaq: LOGI  ) to market the Logitech Keyboard Case, a mix of ZAGG's own ZAGGmate and the peripheral maker's keyboard.

Considering the investment people make in their electronic devices that are becoming ever more essential to the way we live and work, protecting that investment becomes paramount. It spells an excellent opportunity for growth for ZAGG, which the market has apparently failed to price in just yet. It trades for just 13 times forward earnings estimates, which in turn are expected to grow 180% this year and 25% over the next five.

But CAPS All-Star metoo105 takes a different, contrarian view of the situation, asking what's to stop competitors from entering its market as easily as Apple did?

My guess is that pretty much everyone who has piled on short here is simply thinking about Porter's five factors and how there just aren't any moats to this business. The 50% gross margin is unbelievably high. It's even higher than Apple's 40% and Apple has monopolistic pricing (from its IP) and slave labor costs from overseas assembly of its products.

Zigzag your way over to the ZAGG CAPS page and tell us if you think it can protect its market let alone the device in your pocket.

Foolish final thoughts
Stock investing is not brain surgery. Finding good, undervalued companies is not as difficult as the professionals want you to think. You just have to commit to starting now, and do so regularly. Now's the time to begin!

The Motley Fool owns shares of Apple, Ebix, and Logitech. Motley Fool newsletter services have recommended Apple, Riverbed Technology, Ebix, Akamai Technologies, and Logitech. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. Motley Fool newsletter services have recommended Write Covered Call in Logitech. 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. 

Fool contributor Rich Duprey does not have a financial interest in any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.


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