High-Risk, High-Reward Small Caps

This article is part of our Rising Star Portfolios series.

I'll be gathering more small- and mid-cap candidates for my Rising Star "multivitamin" portfolio over the next few days via my Foolish 8 and modified Foolish 8 screens. Today I present the Foolish 8, which was developed by Motley Fool co-founder David Gardner to identify profitable, rapid-growth, small-cap stocks. Here are the eight criteria:

  1. Revenues: $500 million or less.
  2. Earnings and sales growth: 25% or greater.
  3. Net profit margin: 7% or greater.
  4. Daily dollar volume: $1 million to $25 million.
  5. Insider holdings: 10% or greater.
  6. Share price: $7 or greater.
  7. Relative strength: 90 or greater.
  8. Operating cash flow: a positive number.

The contenders
This month, 12 companies passed the screen:


Market Cap (in Millions)


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Altisource Portfolio Solutions $1,166 Real estate management and development Add
Bank of the Ozarks $1,050 Commercial banks Add
CVD Equipment $74 Semiconductors and semiconductor equipment Add
Epoch Investment Partners $541 Capital markets Add
Gulfport Energy (Nasdaq: GPOR  ) $1,711 Oil, gas, and consumable fuels Add
HFF (NYSE: HF  ) $466 Capital markets Add
Hi Tech Pharmacal $458 Pharmaceuticals Add
IPG Photonics (Nasdaq: IPGP  ) $2,226 Electronic equipment Add
Keynote Systems $353 Internet software/services Add
Nanometrics (Nasdaq: NANO  ) $412 Semiconductors and semiconductor equipment Add
SolarWinds $2,138 Software Add
Twin Disc (Nasdaq: TWIN  ) $443 Machinery Add

Source: S&P Capital IQ.

Three companies are on my short list for further research:

  1. IPG Photonics is, for me, the most solid name on the list. This longtime Fool favorite makes high-performance fiber lasers for numerous industries, and is a disruptive force in the market. It features outstanding returns on equity and 26% insider ownership, and it's reasonably priced considering its potential.
  2. Nanometrics is in the business of saving money for semiconductor manufacturers by improving their yields and productivity. The company does incredibly complex stuff (official term) involving the measurement and control of certain processes, and does it well enough to generate strong returns on investment. Also, at least one analyst thinks Nanometrics may be a takeover target.
  3. Gulfport Energy is involved in the exploration and development of oil and gas -- primarily along the Louisiana coast and the Permian Basin, though it has some international exposure also. It somehow maintains an impressive 46% net margin, well ahead of the industry average.

In addition, if you're not in the mood for volatility -- relatively speaking, as all small caps can be volatile – you might want to avoid Gulfport Energy, as well as mortgage investment firm HFF and transmission-maker Twin Disc. Their five-year betas are right around 2.5, easily the highest of the bunch.

I hear CAPS calling
I'm tracking and scoring each one of my monthly screens now, so we can see exactly how they're performing. We refer to it as a CAPScall around these parts, and the Foolish 8 has its own page. Just add it as a favorite to keep up.

After the holiday weekend, I'll show you the results of this month's modified Foolish 8 screen and then talk about the companies that interest me from both screens in more depth.

If you're interested in keeping up with any of these businesses, add them to your free watchlist by clicking the "add" button in the far-right column of the table. You can also follow me on Twitter and check out the multivitamin discussion board.

Fool analyst Rex Moore reminds you that time holds the winning hand. He owns no companies mentioned in this article. The Motley Fool owns shares of IPG Photonics. Motley Fool newsletter services have recommended buying shares of IPG Photonics. 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.

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Rex Moore

Rex Moore spent his formative years in Texas, and fought beside Davy Crockett at the Alamo. He currently travels the globe for TMF, bringing back video reports on conferences and companies that matter for investors.

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Related Tickers

5/24/2016 4:00 PM
GPOR $29.08 Down -0.30 -1.02%
Gulfport Energy Co… CAPS Rating: **
HF $30.95 Up +0.96 +3.20%
HFF, Inc. CAPS Rating: *****
IPGP $84.67 Up +1.76 +2.12%
IPG Photonics CAPS Rating: *****
NANO $18.00 Up +0.02 +0.11%
Nanometrics, Inc. CAPS Rating: ***
TWIN $9.35 Up +0.12 +1.30%
Twin Disc, Inc. CAPS Rating: **