Roundtable: This Small Cap Is Still Too Cheap!

We could say that when it comes to stellar investing returns, thinking big is looking small.

The entire market has been on a tear since bottoming out back in March. The Dow is up 45% from its March low and the S&P 500 has posted an even better 52% gain since the same date.

A handful of large-cap stocks have made stellar moves over that stretch. Las Vegas Sands (NYSE: LVS  ) , for instance, flew to the tune of 988%, and Wells Fargo (NYSE: WFC  ) tacked on 167%. But for many of the biggest movers, like Dollar Thrifty and Diedrich Coffee, we have to turn to the world of small caps. This makes perfect sense, since small caps typically outperform their larger cousins after a recession.

With all of these massive gains, though, many investors are scratching their heads and wondering whether there are still small caps out there that we could label "cheap." To get to the bottom of this question I tapped the best small-cap investors I know -- the folks at the Motley Fool Hidden Gems newsletter.

So fellas, which small caps are still too cheap?

Stan Huber, senior analyst
One sector worth considering is durable-goods manufacturing. These companies have rebounded from March lows, but less so than most types of businesses. Many of these companies, such as Caterpillar (NYSE: CAT  ) , are too large to fit into our small-cap universe. So instead, I've turned to niche manufacturing companies that offer productivity-enhancing products to this industry.

A company that I have my eye on is Faro Technologies. Faro builds high-tech measuring devices for use on the manufacturing floor. These computer-based devices increase productivity and accuracy in any application involving precision parts. The company is well-capitalized and once capital spending gets back on track, it has growth potential that's not reflected in today's share price.

Faro has felt the recession as its customers' capital equipment budgets collapsed. But in addition to a durable-goods uptick that is likely in 2010, it has two other factors working in its favor. It already commands a large market share and it operates in a market that is less than 10% penetrated. This provides a safety cushion for the company in case we're really in for a "new normal."

Mike Olsen, senior analyst
If you're looking for small caps with predictable cash flows and a relatively cheap price tag, look no further than Waste Connections.

Trash is neither glamorous nor a runaway growth story and this stock is hardly likely to prove a shoot-the-lights-out winner. But on the back of recent consolidation -- that is, biggies Waste Management (NYSE: WM  ) and Republic Services making waves within the sphere -- reliable demand for its services, and a sure-footed strategy, Waste Connections should deliver predictable and growing cash flows. And that should prove the basis for some attractive gains from today's prices with relatively low risk.

Andy Cross, Hidden Gems co-advisor
Even though small caps are up 25% over the last six months (and a whopping 70% since the March lows), we're still managing to find interesting, underfollowed, unloved, and just plain ignored small caps for Hidden Gems subscribers.

One I put on my personal watch-list last month, National Presto Industries, has practically zero coverage from the folks on Wall Street. It's not surprising though, because Wall Street investment houses don't know where National Presto fits. This houseware vendor, defense contractor, and private-label diaper maker is part Fortune Brands (NYSE: FO  ) , part Raytheon (NYSE: RTN  ) , and part Kimberly-Clark (NYSE: KMB  ) .

Despite very healthy revenue and profit growth, enviable cash flow, and a price-to-earnings ratio of just 11, nobody seems to care much about this $590 million small fry. Well, except us at Hidden Gems, because this is exactly the type of stock we like to find.

Want to see what stocks are making their way into the Motley Fool Hidden Gems portfolio? You can take a free 30-day trial of Hidden Gems and get access to all of the crew's ideas. 

Fool contributor Matt Koppenheffer does not own shares of any of the companies mentioned. Fortune Brands is a Motley Fool Stock Advisor selection. Kimberly-Clark and Republic Services are Motley Fool Income Investor selections. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy likes short walks on the pavement.


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  • Report this Comment On October 05, 2009, at 1:17 PM, rizzo101 wrote:

    Wasn't Faro Tech the pump and dump stock from "Boiler Room"?

    I just thought it was interesting in an environment that seems harder than ever to get real information.

  • Report this Comment On October 05, 2009, at 11:41 PM, NASDAQCZAR wrote:

    Imperial Capital Bank IMPC is the cheapest trading bank with book value $19.50 a $4.4 billion California bank, upside 1000-10000% hired a new CEO today booming up now 50% today, Wallst will give the new CEO a chance to turn things around at Imperial this is a gift. Its time to back the truck up on IMPC as California recovers IMPC will mirror that recovery. IMPC Too Big To Fail.

    IMPC is the best opportunity to come along in a very long time. This is a gift of lifetime. Imperial Capital Bank has $1 billion GNMA securities goverment backer Ginnie Mae income producing securities that will offset weakness in real estate. I'm loading up on IMPC eom

  • Report this Comment On October 06, 2009, at 7:04 AM, dinksta wrote:

    Haha. I think Faro Tech was from "Boiler Room"!

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