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 those they think have the best chance for winning.

Here are two stocks this simple screen found:

Company

Market Cap

Actual EPS vs. Estimated EPS

Average Analyst 5-Year EPS Estimate

CAPS Rating (out of 5)

Entropic Communications (Nasdaq: ENTR  )

$485 million

67%

16%

***

Glu Mobile (Nasdaq: GLUU  )

$335 million

33%

30%

**

Sources: 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.

Back in a flash!
Maybe it's not so much that a trend is failing to catch on that causes stocks in the space to lose their luster. Rather, it could be that it's still the first inning of the game and the landscape can greatly change by the time we hit the 7th inning stretch -- let alone the last out in the bottom of the ninth.

The Fool's technology expert Eric Bleeker correctly predicted that home entertainment stocks like Entropic Communications, MIPS Technologies, and Rovi were due for a strikeout earlier this year because Apple (Nasdaq: AAPL  ) and others could deliver the clutch hits. The lesson delivered: "Just because a technology field is about to grow doesn't mean investing gains will follow."

That could be, but I think Entropic in particular is one that will hit a home run because the run up -- and subsequent run down -- of its stock was just its first real at bat. The connected living room is coming soon to a couch near you and Entropic's MoCa chips will propel it higher, as they enable devices to use coaxial TV cables for high-quality networking purposes. Its recently acquired set-top-box system on a chip business showed strong growth, and Entropic raised per-share profit guidance as a result.

With cable operators transitioning from current coding technologies to IP-based systems, Entropic's end-to-end platform will provide cable companies with the ability to run next-gen consumer apps from a set-top box over an Entropic-powered home network.

I've rated Entropic Communications to outperform the market averages on CAPS, but you can tell me in the comments box below if you agree it will be hitting plenty of singles, doubles, and home runs in the innings to come.

A horse race
Will the difference between Glu Mobile and Zynga (Nasdaq: ZNGA  ) be the latter's reliance upon Facebook (NYSE: FB  ) and the former's freedom to be platform-independent?

As Facebook's growth slows, Zynga -- which accounts for 15% of the social networking site's revenue -- saw its stock plummet 40% after reporting revenue that came in below analyst expectations, profits that were turned into losses, and guidance that looked dismal.

Glu Mobile, on the other hand, was initially sucked down by its rival's report, only to bounce back after rushing to the news wires its estimation that its own results were going to be better than expected. Full-year guidance was also on the rise.

I'll admit to not being a fan of Glu's "freemium" business model. The free-to-play/pay-to-play-more online gaming business model is not a tried-and-true winner, as Perfect World and Electronic Arts have found out to their chagrin. Players just don't like being nickeled-and-dimed for the game experience. Glu might be riding the mobile computing trend higher -- the same one that's supposedly set back Entropic -- but I'm betting the game maker's got a shorter life span than those that power it, so I'm leaving my underperform rating on CAPS unchanged.

Admittedly, I'm in the minority there. On CAPS, 86% of those weighing in on the game maker believe it will go on to beat the Street, but you can let me know in the comments box below if being free from Facebook is indeed a deciding factor in its favor… or whether Glu Mobile will be heading off to the glue factory.

A small price to pay
There may be a niche for mobile gaming -- want to know for sure? Grab yourself a copy of this brand-new premium research report on Zynga. You'll also get quarterly updates as it reports earnings and other developments occur. Sign up 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 and Apple. Motley Fool newsletter services have recommended buying shares of Facebook and Apple. Motley Fool newsletter services have also recommended creating a bull call spread position in Apple. 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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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 25, 2012, at 3:38 PM, alexxthegreat wrote:

    Entropic has a deal with Comcast and Comcast is hot right now, in part, because of the new Entropic Communication products.

    The News:

    This is Just the Beginning:

    Comcast Sees 156,000 New Broadband Subscribers

    Slows Number of Basic Cable Defections

    by Karl Bode Wednesday 01-Aug-2012

    Given that AT&T and Verizon have all but given up on landline broadband, and in some instances are literally driving DSL users into the arms of cable, it is not too surprising to see cable operators outperform in broadband subscriber additions

    Why Cable Is Winning the Cord-Cutting War

    Hollywood Reporter‎ -

    Alerts ... Comcast net up 32% on continued broadband growth

    If Karl Bode is right, Entropic is about to experience phenomenal growth. It appears from what he says that ATT and Verizon have surrendered a massive market to Comcast. In a brilliant tactical move, Entropic has strengthened their ties to Comcast. The Trident purchase and product development, which seem aimed at Comcast is paving the relationship.

    The other reason for Entropic's rise is 3D.

    entropic products are built for 3D.

    What will 3D mean?

    Let us look at the potential.

    3D-capable screens multiplied 4X in past two years Sony’s early focus on developing digital cinema technology led to its collaboration with U.S. movie industry leaders to develop 3D systems for the various stages of movie production, from shooting through to screening. . Today, the environment for 3D movies is expanding rapidly.

    Movies are just one application.

    Other applications are:

    3D Cloud Hosting

    3D Mobile Marketing

    3D Walk through Designs-this is new; An engineer or any designer of any product can walk through

    a 3d Hologram of a design......Software available now

    3D Shape......A design can now be shaped piece by piece in 3D

    3D Live marketing software----sales techniques will change; Marketing will be less expensive:

    3D Mobile viewer and player.....Expect it with Zenverge/Entropic----stream from any website in 3D practically anywhere; stream in 3D

    There is only one way to make the audience or single viewer immediately see and understand what is meant by the presentation. This is with 3D.

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