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Wall Street pros have nothing on retail investors who stake small sums of money monthly on undervalued small-cap stocks. Because they're mostly ignored by the big guns, these types of stocks offer the best outsized opportunities for growth.
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 Motley Fool CAPS community and examine those they think have the best chance for winning.
Here are some of the stocks this simple screen found:
EPS Act. vs. Est.
Avg. Analyst 5-Yr. EPS Est.
CAPS Rating (out of 5)
|3D Systems (NYSE: DDD )||$1.7 billion||77%||22%||*****|
|Cree (Nasdaq: CREE )||$2.8 billion||15%||22%||***|
Source: Zacks 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.
Growth in bas relief
The buzzword in printing these day is three-dimensional printing, churning out an actual thing instead of its representation on a piece of paper. Both 3D Systems and its primary publicly traded rival, Stratasys (Nasdaq: SSYS ) , are forging their place in the industry but taking different paths: 3D is going after the consumer market, launching its home-use Cube printer, while Stratasys is tackling the commercial market, both of which represent huge profit-making opportunities.
Yet as exciting as all this is, there are concerns beyond just the practical application of the technology in the home, because that's where the greatest dangers lie. Imagine parents producing their own Lego or K'Nex sets of plastic building blocks, or their own Transformers toys. The Digital Millennium Copyright Act might make the battles of copying music look like small potatoes. It's a minefield yet to be explored and could slam a huge brake on the acceleration of the industry.
And it is heating up. 3D Systems enjoyed a 63% jump in first-quarter revenues with per-share profits soaring 47% as the number of 3-D printers sold surged 153% over last year. I don't know if the systems will ever reach the razor-and-blades business model that more mundane inkjet printers enjoy today -- virtually giving away their printers and making their money on the ink refills -- but the consumables portion of 3D's business, the print materials, also jumped 58% from the year-ago period.
CAPS member troym72 believes the tsunami of demand for home units is building, and says, "The only question is whether [3D Systems] will be able to keep up with deman[d] once 3-D printing mania takes the USA consumers by storm."
Assuming lawyers don't foul up the potential, it could be huge, but tell me on the 3D Systems CAPS page or in the comments box below whether you think copyright infringement will be a stumbling block, then add the stock to your Watchlist to see whether it can continue printing out profits.
LEDing the way to profits
Interestingly, the market opportunity being laid out for 3-D printers sounds a lot like the one that had been hyped for the LED lighting industry. As the move was made away from incandescent bulbs, the compact fluorescent was seen as merely a way station on the path toward LEDs that would be the real technological breakthrough in commercial and residential lighting.
Even with Congress helping it along by banning some incandescents, LEDs were tripped up by cost. They're more energy-efficient and longer lasting, but the initial out-of-pocket expense of buying LEDs has made universal adoption slow.
Earlier this year Cree missed earnings expectations; Aixtron (Nasdaq: AIXG ) reduced full-year guidance, citing margin pressures and delayed orders; and Veeco Instruments (Nasdaq: VECO ) reported that orders of metalorganic chemical vapor deposition, or MOCVD, equipment -- a critical tool used in LED production -- would likely fall more in the first quarter of 2012.
Cree's third quarter continued to be challenging as it reported a 30% increase in revenues, which was slightly below its own target range, and profits slid 22% from the year-ago period. Management does point to growing backlog in lighting, LEDs, and RF, but visibility remains foggy, and as Foolish investors know, backlog doesn't always perfectly translate one-to-one into revenues. It's a hopeful sign, though, and LED adoption is growing.
LED lighting is expected to grow at double-digit rates in Germany through 2018, while all of Europe is expected to see a sevenfold increase by 2015. Here in North America, the market researchers at Frost & Sullivan see the market rapidly expanding at a 32% annual clip between now and 2016. It's clear, wherever you look and whatever the time frame, that LED lighting will be huge, and MalcoweeDaddy says that Cree, as a dominant market player, will benefit.
With the stock down 30% from its 52-week high, I've rated Cree to outperform the market averages on CAPS, but let me know in the comments section below whether it can still shine a light on growth, then add the stock to the Fool's free portfolio tracker to see whether it can capitalize on the helping hand the dim bulbs in Congress have provided it.
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 only available for a short time, so ask for your copy today and find out the two cash kings that are changing the face of their industry.