Start Small, Win Big

Wall Street pros have nothing on retail investors who stake small sums of money monthly on undervalued small-cap stocks. Because the big guns mostly ignore them, these types of stocks offer the best outsized opportunities for growth.

Today, we'll screen for stocks that have less than $3 billion in market cap and offered earnings surprises of 15% or more in the previous quarter, with long-term earnings growth forecasted to be at least 15%. We'll then filter our findings through the collective investing wisdom of the Motley Fool CAPS community and those they think have the best chance for winning.

Here are some of the stocks this simple screen found:


Market Cap

EPS Actual vs. Estimated

Average Analyst 5-Year EPS Estimate

CAPS Rating (out of 5)

Smith & Wesson Holding (Nasdaq: SWHC  ) $427 million 75% 22% ***
Sourcefire (Nasdaq: FIRE  ) $1.6 billion 38% 20% **

Sources: 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.

Taking aim at growth
Despite hitting the earnings-beat bull's-eye in the latest quarter, both publicly traded gunmakers Smith & Wesson Holding and Sturm, Ruger (NYSE: RGR  ) saw their shares get shot up on the market. Looking like bullet-ridden rural deer-crossing signs, Smith & Wesson's stock is off 25% from recent highs while Ruger is down by a third.

Part of the reason given for the strong operational performance of both companies is the possibility that President Obama wins a second term in office. Just as happened when he first ran, fear of legislative threat could be driving gun owners to stock up before the hammer comes down.

Smith & Wesson reported that preliminary firearms order backlog more than doubled to approximately $439 million while Ruger has been supply constrained, having to actually stop taking orders at one point because it couldn't keep up with demand.

With a Supreme Court finding restrictive state gun laws unconstitutional, I'm not sure Obama would be successful if he tried to limit gun ownership, but it's the attempt to circumvent the Constitution that has pro-gun advocates alarmed. CAPS member DanCooper76 sees other reasons to exercise the right to bear arms.

If it's not the fear of Obama coming for your guns as a lame duck in a second term, it's the fear of riots from a recharged Occupy movement. Oh and the world might end in December. Ride the momentum.

Tell me on the Smith & Wesson Holding CAPS page if you see the gun maker surviving the end of the Mayan calendar, and then add the stock to your Watchlist to see if it can shoot out estimates again.

Security blanket
A few years ago, teen retailer Pacific Sunwear thought it would branch out into women's shoes because it was ... underserved? I remarked that whatever things the women's shoe market was, "underserved" wasn't one of them.

That was also my initial reaction to hearing there was a relatively new small upstart in the network security industry that analysts were getting excited about. With larger, better-financed players like Check Point Software Technologies (Nasdaq: CHKP  ) and Symantec (Nasdaq: SYMC  ) dominating the field, what could Sourcefire possibly bring to the table that would make it a standout?

Turns out, a lot. It's a pioneer in intrusion prevention systems that examine data on large networks in real time that flushes out hidden threats and suspicious activity while also neutralizing problems. The government uses Sourcefire's systems and considers them so key it actually nixed Check Point's attempt to acquire it (Check Point is a foreign own company, and the government didn't want anyone else having access to the technology it uses).

Businesses like its intelligent security design, too, and segment revenues rose 28% in the first quarter, fueling a 50% jump in total revenues and causing adjusted net income to nearly triple.

It appears to me there's a lot more growth in Sourcefire, and though it trades at nosebleed valuations at the moment, I think there's value still if for no other reason that another company -- a domestic one -- will want to acquire its technology and IP. I've rated it to outperform on CAPS, but let me know in the comments section below or on the Sourcefire CAPS page whether you think it can beat the market averages, and then add the stock to the Fool's free portfolio tracker to see whether it can burn up the charts again.

Foolish final thoughts
These companies may have the odds stacked against them, but The Motley Fool has identified two stocks that are also facing difficult times yet still grow revenues hand over fist. The report is free, but it's available for only a short time, so ask for your copy today and find out the two cash kings that are changing the face of their industry.

Fool contributor Rich Duprey holds no position in any company mentioned. Check out his holdings and a short bio. Motley Fool newsletter services have recommended buying shares of Sourcefire and Check Point Software Technologies. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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Rich Duprey

Rich has been a Fool since 1998 and writing for the site since 2004. After 20 years of patrolling the mean streets of suburbia, he hung up his badge and gun to take up a pen full time.

Having made the streets safe for Truth, Justice and Krispy Kreme donuts, he now patrols the markets looking for companies he can lock up as long-term holdings in a portfolio. So follow me on Facebook and Twitter for the most important industry news in retail and consumer products and other great stories.


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Related Tickers

12/31/1969 7:00 PM
FIRE.DL $0.00 Down +0.00 +0.00%
Sourcefire CAPS Rating: **
SWHC $22.87 Up +0.21 +0.93%
Smith & Wesson Hol… CAPS Rating: ****
CHKP $81.85 Down -0.16 -0.20%
Check Point Softwa… CAPS Rating: ****
RGR $67.17 Up +0.91 +1.37%
Sturm, Ruger & Com… CAPS Rating: ****
SYMC $16.60 Down -0.07 -0.42%
Symantec CAPS Rating: ***