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, making now a great time to start looking for tiny treasures.
3. Micro-cap stocks can burn 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.

Drum roll, please ...
So without further ado, here are five CAPS stocks that sport four or five stars (out of five), have market caps between $100 million and $200 million, and have three or fewer professional analysts covering them.

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, Hawkins and BTU International might just be a pair of small wonders worthy of your Foolish due diligence.

Chemically charged
Stable dividend-paying stocks are usually associated with only the biggest and most unexciting companies. Hawkins -- a company that formulates, blends, and distributes specialty chemicals -- certainly qualifies as a boring business. But with a market cap of only $161 million, Hawkins is a consistent dividend payer that actually comes in a small package.

Over the last five years, Hawkins has generated steady operating cash flow and has even increased its top line at a compounded rate of 8.3%. That might not sound like much, but when your three business segments are water treatment, industrial chemical, and pharmaceutical chemical, I'd say any kind of growth is welcome. With an EV/EBITDA of 8.6 and a 2.80% yield, Hawkins might be worth a call on CAPS.

CAPS All-Star stillwater9999 makes a dull argument:

This company is the essence of boring. Sells water treatment chemicals. Stock has a tendency to get stuck at a given price level for years, but long term it beats the S&P. Pays a dividend to you while you wait for it to get unstuck. Solid, boring and underfollowed. The path to riches.

Alternative investment
BTU International is another stock in the long tail that piques the interest of our CAPS players. The Massachusetts-based company is a leading supplier of thermal processing equipment to the electronics and alternative energy markets -- just a tad more exciting than Hawkins.

Despite its size, BTU's top revenue-generating customers include big names like Intel (NASDAQ:INTC), BP Solar, and Sony. Fueled by these relationships, BTU has delivered returns on equity of roughly 20% for the past three years, while utilizing very little debt. The stock is up nearly 60% in 2007, but according to our CAPS community, BTU still represents a good way to play the growth of solar energy.

I'm not much of an alternative-energy guy myself, but for Fools interested in this area, Chairman and CEO Paul Van Der Wansem's 16% stake in BTU might be of some note.

CAPS All-Star NetscribeTech touches on some of management's recent moves:

On an expansion spree, the company acquired Radiant Technology and Dana Corp's operations in mid-2006 to increase its production lines, and to seek synergistic benefits. Strategically moving, it is focusing on cost reduction initiatives, including the improvement in global supply chain to give a boost to its operating margins.

Are we on the same micro-wavelength?
But, of course, the real question is whether you believe these companies are real micro-marvels -- or just small shrimps waiting to get 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.

Microsoft and Intel are Inside Value picks. You can check out any of the Fool's newsletters -- including Motley Fool Hidden Gems, which seeks out small-cap wonders -- free for 30 days.

Fool contributor Brian Pacampara owns no position in any of the companies mentioned. The Fool's disclosure policy is never too small to be seen.