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 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 find those they think have the best chance for winning.

Here are two stocks this simple screen found:


Market Cap

EPS Act. vs. Est.

Avg. Analyst 5-Year EPS Est.

CAPS Rating
(out of 5)

Fusion-io (NYSE: FIO  ) $2.0 billion 250% 29% ****
Westport Innovations (Nasdaq: WPRT  ) $2.0 billion 35% 30% *****

Source: Zacks, 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.

Back in a flash!
After reporting strong revenue and profit growth after the market closed yesterday, and saying the future was looking just as bright, Fusion-io opened Friday morning 30% higher than its previous close.

Fusion-io makes flash memory cards that help rev up the speed of conventional servers by acting as a high-performance cache. Typically, data centers house all their data in huge storage arrays and wait for the data to be called upon as needed. Fusion-io's software transforms the servers into blazing-fast data-acceleration appliances, and is behind Facebook's data centers, Apple's iCloud service, and's move to the cloud. While some analysts believe Fusion-io will soon become an industry standard, there are those who would beg to differ.

EMC (NYSE: EMC  ) is one that finds Fusion-io less than what it seems, though that's to be expected. Storage arrays are EMC's forte, but it recently acquired flash maker XtremIO to break up the bottlenecks Fusion-io says are part and parcel of conventional server banks. Storage array specialist NetApp (Nasdaq: NTAP  ) recently joined with Fusion-IO to help improve performance of its storage solutions.

With Fusion-io forecasting sales to run 50% higher this year (well above analysts' 37% expectations), the market catapulted Fusion-io to the fore. CAPS member velo15 calls the flash maker's software "SSD tech for large servers" and expects that it will be acquired sooner rather than later. I've also rated Fusion-io to outperform the market averages on CAPS. Tell me in the comments box below if you think EMC's criticism holds any water.

It's a gas!
Despite natural gas prices having bounced 54% higher from the lows of April, oil prices at $94 a barrel remain elevated. That promises natural gas will remain a popular energy source for the foreseeable future and should continue to spur investment in the alternative fuel engines Westport Innovations and Fuel Systems Solutions (Nasdaq: FSYS  ) are pursuing.

Westport reported last week that revenues more than doubled from the year-ago period as units shipped surged 90%, and significantly narrowed its losses. It ended up beating analyst expectations on both the top and bottom lines.

While I long ago rated Westport to outperform the broad market indexes on CAPS, based on its established record in industrial situations, strategic partnerships like the one with Cummins, and potential new business with heavy-equipment maker Caterpillar, the real potential for the stock is a mass-produced car for consumers. I see that as its greatest strength, but perhaps also its biggest weakness.

Alternative-fuel vehicles just are not catching on these days. From hybrids to plug-ins, carmakers saw sales growth sag even if the number of cars sold was much higher than in the year-ago period. Maybe it's the technology glitches that are causing consumers to hold off. Natural-gas vehicles might be enough like traditional autos to overcome the reluctance, but drivers are generally sticking by their traditional, gas-guzzling, carbon-footprint-stomping vehicles.

CAPS member p366 thinks Westport's superior technology will persuade drivers to switch, and as fueling stations become more prevalent, they'll be able to make the change more naturally. Use the comments box below to let me know if you have the same positive outlook for the engine maker.

A small price to pay
If the idea of Caterpillar expanding the use of natural-gas engines to heavy machinery intrigues you, check out the Motley Fool's new premium research report on Caterpillar, which goes into all the details of the opportunities and risks facing the company, along with the three critical areas you must keep an eye on. Download your report today!

Fool contributor Rich Duprey owns shares of Apple, but he holds no other position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool owns shares of, Facebook, Apple, EMC, Westport Innovations, and Fusion-io. Motley Fool newsletter services have recommended buying shares of, Apple, Facebook, Westport Innovations, and Cummins. Motley Fool newsletter services have recommended shorting

The Motley Fool has a disclosure policy. We Fools may not 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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