The Best Small Cap for 2007: Volcom

I like what I see at Volcom (Nasdaq: VLCM  ) . Of course, the company's motto, "Youth Against Establishment," also had me at hello. But there's more to the story than that.

Back in July, I covered Volcom's second-quarter announcement, when shares got slammed despite an impressive quarter. Although the company did have some challenges due to problems at one of its major customers, Pacific Sunwear (Nasdaq: PSUN  ) , I felt the company's strengths were still intact. I took advantage of the wipeout to make an outperform call in our Motley Fool CAPS community intelligence database -- and it's been my best-performer every since.

So while Volcom has been a winner in my CAPS portfolio, will the stock be a winner in 2007 -- and maybe even the next home run stock?

Surf's up
Volcom's not exactly on the average retail investor's radar -- it distributes its apparel through select retailers. Volcom's biggest job is not only working on distribution, but also nurturing its brand, something it seems to do very well.

When it comes to boardsports apparel, many people think of Pacific Sunwear and Zumiez (Nasdaq: ZUMZ  ) . They both distribute Volcom apparel, as do Nordstrom (NYSE: JWN  ) and more recently, Federated's (NYSE: FD  ) Macy's. Volcom's also dabbling in its own retail stores.

Volcom may be hip, but its financials back it up. It's got nearly $85 million in cash and almost no long-term debt. In addition to its impressive growth rates in sales, profits, and margins, here's another advantage: founder and CEO Richard Woolcott. Not only is he extremely invested in Volcom, with a 16% stake, but he's a former professional surfer. He understands the clientele, and it's a good bet he's got a real passion for the business he has created and fostered.

Why Volcom's a winner
Skateboarding was fairly underground when I was a teenager. I watched videos of the skate team Bones Brigade (which included Tony Hawk, now a near-household name given a certain well-known videogame) with my rebellious friends back in the old days, but that punk spirit lives on today, judging by Volcom's "Youth Against Establishment" marketing.

Times have changed from when skaters had few options other than building their own half pipes or using public property to practice their tricks (and often terrorize passersby). Skateparks are cropping up, and some public parks include half pipes now. I ran across one piece of data (sadly uncited in Wikipedia) that said a new skatepark opens every three days. Extreme sports have grown in mainstream popularity, and it's not difficult to imagine how that momentum will continue to benefit Volcom.

Volcom doesn't have the niche to itself; rivals include Quiksilver (NYSE: ZQK  ) and Billabong, as well as privately held Burton. Nike (NYSE: NKE  ) has set its sights on this segment, too, which implies that it's an attractive niche -- although the megacorporation has had challenges cracking it.

In my opinion, the most interesting thing about Volcom is the air of authenticity it works hard to foster. Volcom sponsors athletes and boardsports contests alike, has its own record label, and makes boardsports-influenced films. This not only functions as marketing (with an emphasis on the grass roots, the only way to go these days) but also makes Volcom a real part of the culture. Volcom's website brings to mind the culture, not the merchandise. That's a big part of why Volcom's a winner, in my book.

Volcom: Stoked for 2007?
I believe boardsports, with their thrilling, ever-evolving tricks and focus on individualism, are here to stay, and that the retail markets surrounding them are due to grow. That bodes well for Volcom, as long as it can keep its brand intact.

Do you agree with me, that Volcom could be the best small-cap stock for 2007? Then let your voice be heard by clicking "outperform" on Volcom in our new community intelligence database, CAPS. And of course, feel free to disagree, too, and give Volcom an "underperform" call. Just click here to let us know what you think. We'll declare the best stock of 2007 early next week, based on your thoughts.

Seen our other contenders for best small cap? If not,click here.

Volcomand Zumiez areMotley Fool Hidden Gemsrecommendations.Pacific Sunwear has been selected by Motley Fool Stock Advisor.

Alyce Lomax does not own shares of any of the companies mentioned. As of this writing, she was ranked 1,875 out of 14,968 in CAPS. The Fool has a disclosure policy.


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