3 Great Small Caps You've Never Heard Of

When it comes to investing, a certain amount of comfort can be had by holding the stocks of massive, widely known businesses.

After all, who wouldn't want a slice of Apple's giant pie after watching it sell millions upon millions of iPhones and iPads? -- and that's not to mention the staggering amount of cash the company makes from its world-class ecosystem selling digital goods to the masses. With 45 market research firms covering Apple, you can also be sure there's plenty of material available to help you decide whether its shares are worth your money.

However, its easy to forget that every large-cap stock had to start somewhere. For investors who discovered these great businesses early on... well, one would hope they're satisfied with their life-altering returns.

Now this doesn't mean you should rush out to mortgage your home and load up on micro-cap penny stocks. To the contrary, penny stocks can be dangerous and represent a great way to lose your shirt. Instead, consider looking for little-known small cap companies -- that is, stocks with market capitalizations between $250 million and $1 billion -- with sustainable underlying businesses and solid growth opportunities.

With this in mind, here are three such stocks I believe fit the bill:

 Company Market Cap Est. Long- Term
Growth Rate
Analyst Coverage CAPS Rating
 (out of five)
Retail Opportunity Investments (NASDAQ: ROIC  )  $679 million  11.8%  3  *****
Tile Shop Holdings (NASDAQ: TTS  )  $756 million  18%  5  ****
BJ's Restaurants (NASDAQ: BJRI  )  $884 million  15.5%  13  ****

Sources: Yahoo! Finance, Motley Fool CAPS.

In all fairness, while these businesses are indeed small, that doesn't mean absolutely nobody knows about them. In fact, if you currently subscribe to any of our newsletters, you may already be familiar with all three. Even so, when I mention these tickers in conversation, I'm generally greeted with a blank stare and a fake smile that cries, "Can we just get back to Apple?"

Nonetheless, here's why you should care about these often-overlooked names.

A world of opportunity
First up, perhaps you could consider building a position in real estate investment trust Retail Opportunity Investments.

At the end of 2012, led by veteran real estate investor and CEO Stuart Tanz, this niche shopping center specialist owned 45 "necessity-based" retail properties, primarily focused in densely populated, middle- and upper-income markets across the the U.S. As an REIT, Retail Opportunity Investments is required to pay at least 90% of its taxable income back to shareholders in the form of dividends. Last week the company raised its quarterly dividend 7.1% to $0.15 per share (for a current yield of 4.7%), so you can be happy to get paid for your patience while you wait for shares to appreciate.

In short, if you believe commercial real estate will eventually bounce back, Retail Opportunity Investments is a great place to put your hard-earned cash to work.

Shopping for profits
Next, why not improve your portfolio with Tile Shop Holdings?

While Tile Shop is still shedding its spots as a public company given its late 2012 IPO, the high-end stone and tile flooring business was founded nearly 30 years ago with a single store in Rochester, Minn. By the end of 2012, Tile Shop had managed to grow its number of locations by 28% year over year, boasting 68 stores in 22 states. In addition, management has reiterated their ability to profitably maintain this torrid rate of growth going forward, with plans to expand to Texas and Colorado in 2013.

Not only that, but as fellow Fool Jim Royal recently pointed out, thanks to the company's Lumber Liquidators-esque business model and impressive same-store sales increases of 7.1% last year, each Tile Shop location generates enough cash to allow the company to pay for its rapid expansion outright and still have free cash flow left over.

Brewing gains 
Finally, you might be wondering why BJ's Restaurants made the list. After all, with 13 analysts covering the stock, it seems like someone already let the cat out of the bag. To be honest, though, the restaurant chain hadn't crossed my radar until just last year, and even then only as I was digging into potential competitors for Buffalo Wild Wings. However, that shouldn't come as too much of a surprise considering nearly 70% of the company's 130 locations are in California and Texas, with the remainder spread across just 13 other states.

In addition, aside from the utterly awesome fact that BJ's brews and serves its very own award-winning beer, the company's growth prospects are downright intoxicating: BJ's management plans to eventually more than triple its number of domestic locations to 425. Considering they currently have plans to open 17 new locations in 2013, investors are set to enjoy years of profitable growth. Furthermore, like Tile Shop, BJ's is also able to fund its expansion from cash flow and carries zero debt on its books.

Small stocks, big profits
In the end, whether you prefer real estate, brewpubs, or high-end flooring, I'm convinced all three of these solid small-cap stocks represent fantastic long-term opportunities for retail investors to beat the market.

3 more for the road
The retail space is in the midst of the biggest paradigm shift since mail order took off at the turn of last century. Only those most forward-looking and capable companies will survive, and they'll handsomely reward those investors who understand the landscape. You can read about the 3 Companies Ready to Rule Retail in The Motley Fool's special report. Uncovering these top picks is free today; just click here to read more.


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  • Report this Comment On March 26, 2013, at 3:50 PM, megalead wrote:

    Maybe they could merge and they could serve beer while we shop for tile?

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