5 Top Micro-Cap Stocks

Hey there, Fools. We're back again to help you identify some of the most attractive micro-cap stocks worthy of your investment dollars. Just as a reminder, we do this because:

1. Underfollowed micro-cap companies offer great returns -- and sometimes even the best returns.

2. Wall Street is covering fewer stocks than ever before, and that makes now a great time to start looking for tiny treasures.

3. Micro-cap stocks can burn you if you don't do your homework, so we try to shed more light on the asset class for you.

Microscopic surgery
This column uses our Motley Fool CAPS community-intelligence database to turn up promising stocks. The system asks amateur and professional investors alike to rate stocks either "outperform" or "underperform." In turn, each investor is rated, as is each stock.

The end result is that while only huge companies like Microsoft (NASDAQ:MSFT) have more than 15 or 20 analysts following them, CAPS harnesses the ideas of thousands to get at the long tail of the stock market with the same depth of coverage.

Drumroll, please ...
So without further ado, here are five CAPS stocks sporting five stars, the highest rating possible, that have market caps between $100 million and $200 million and that three or fewer professional analysts are covering.

As always, don't view these stocks as hearty formal recommendations, but rather as appetizing starters for further analysis. Agreed?

Now that we have that settled, On2 Technologies and SORL Auto Parts might just be two small wonders worthy of your Foolish due diligence.

Onto bigger and better things
When companies lay claim to having the "next big thing," a Foolish dose of skepticism always comes in handy. However, On2 Technologies, winner of the 2006 Frost & Sullivan Award for Technology Innovation, may actually have something to hang its hat on.

According to many, On2's TrueMotion codec allows services to deliver streaming video with unmatched image quality. I'm no tech guru, but when names such as Adobe (NASDAQ:ADBE), Electronic Arts, Skype, and even XM Satellite Radio are wholeheartedly adopting a company's technology, the stock is definitely worth a second (or even fifth) look.

On2 has yet to turn a profit, but the stock has more than doubled in the past year -- fueled primarily by 200% revenue growth. In addition, On2 was recently recommended by Merriman Curhan Ford -- one of CAPS' and Wall Street's best.

CAPS All-Star upanddown100 also thinks On2's on to something:

On2 makes the best codec for the ubiquitous FLASH video and sells encoding platforms for social networking sites and individual developers. ... The revenue model here is "back-end loaded" (in other words royalties, royalties, and more royalties) so once On2 hits critical mass in the mass media -- the profitability of the company will go through the proverbial roof.

These are the brakes
SORL Auto Parts, a Chinese manufacturer of air-brake valves, is another stock in the long tail that piques the interest of our CAPS players. In 2006, SORL signed a major deal with Tata Motors, India's largest auto company, to supply the brakes for its commercial-vehicle segment. As my colleague Tim Hanson points out, both companies stand to benefit from the rapid growth of car sales in their respective countries. 

In China, SORL owns the top market share in each of the air-brake-valve segments -- heavy-duty, OEM, and replacement. If CEO Xiaoping Zhang can maintain that lead, all while continuing to ink international partnerships, Mr. Market is going to have a tough time stepping on these brakes.

With top-line growth of 32% in 2006, no debt, and a fairly attractive forward P/E of 11, the Asian SORL could be safer than you think. CAPS All-Star sandvig brakes -- er, breaks -- it down for us:

This company makes brake parts for large commercial vehicles (trucks, vans, buses) in China. They recently signed an agreement to supply parts for a customer in India. I would think that both of these are very good markets. ... They have good margins, a ROE of 21%, and a modest P/E ratio.

Are we on the same micro-wavelength?
Of course, the real question is whether you believe that these companies are real micro marvels or just small shrimps waiting to squished. Log on to CAPS, and let us know how you feel.

It's absolutely free, and within seconds, you'll have access to thousands of potential stock ideas. Join now -- more teeny-tiny treasures await their discovery.

Make seven picks on CAPS by April 24, and we'll send you a free copy of The Motley Fool Five-Star Report. Inside, you'll discover how to use CAPS as a research tool, and you'll receive a recommended five-star CAPS pick poised to beat the market for the next decade or more -- one that you can easily translate into profits for your real-world portfolio. But please hurry -- this special report will be emailed out on Tuesday, April 24. And it's being sent only to CAPS members who have their seven picks in. Get started now!

Fool contributor Brian Pacampara owns no position in any of the companies mentioned. Microsoft is a Motley Fool Inside Value pick. Electronic Arts is a Stock Advisor choice. The Fool's disclosure policy is never too small to be seen.