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 |
$485 million |
67% |
16% |
*** |
|
Glu Mobile |
$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
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
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.
