3 Stocks to Buy Before Everyone Else Does

Over the past month, I've had numerous friends ask me the same old question: "Should I buy shares of Apple (Nasdaq: AAPL  ) or Google (Nasdaq: GOOG  ) , or is it just too late?"

As I'm not a tech junkie and can't predict the future, the short answer is typically "I don't know."

The long answer normally involves me pointing them toward some lesser followed stocks and illustrating to them the advantages of small-cap securities. Read on and I'll show you why I'm actively looking for small companies to invest in, and then provide you with three great ideas for your investment dollars.

Not following the crowd
Buying companies like Apple or Google make plenty of sense, as both are drastically changing the landscapes in which they do business. The success of Apple's iPod and iPhone are already well known; now the company has given itself a massive advantage in the tablet world as well. As PC sales continue to decline, Apple should be able to scale up and increase revenues even more. The same can be said for Google: The company already has the lion's share of search traffic and has aggressively gotten involved in cloud computing with its version of Google Apps.

However, during the last five years, at a time where the market has been flat, Google has gone up by over 65% and Apple has more than quintupled in price. Add to that combination the fact that both have dozens of analysts scouring their quarterly reports, in addition to thousands of retail investors reading the barrage of media coverage that each company receives, it becomes difficult to make a truly intelligent decision. What is your advantage as an individual investor? What information or expertise do you have that someone else does not?

Now I'm not saying you shouldn't buy Apple or Google -- in fact, my foolish colleague Eric Bleeker recommended in early January that you scoop up shares of the iPhone maker.

I'm simply advocating that buying small-cap companies, ones that analysts typically ignore, can give you some serious advantages. Remember that the Apples of the world were once small companies too, and if you can find one of these gems before everyone else does, well, you may have just stumbled onto the next best investing opportunity.

Far from making the headlines
When I'm looking for hidden gems, there are a few traits I like to find. First, the company should be small: less than $1 billion market cap. Second, I want to make sure they are growing revenues at a rapid clip. I also want proof that management is adept at allocating capital (typically by illustrating a high ROE); and lastly, I want what everyone wants: a reasonable price!

The three stocks I've listed below fit those criteria to a T and would be great to add to your watchlist:

Company

Market Cap (Millions)

5-Year Revenue CAGR

Return On Equity

P/E Ratio

China Digital TV (NYSE: STV  )

$353.5

46.1%

15.5%

10.6

Power-One (Nasdaq: PWER  )

$775.5

32%

66.8%

7.5

Bridgepoint Education (NYSE: BPI  )

$973.0

145.8%

68.4%

8.5

Source: Capital IQ, a division of Standard & Poor's.

China Digital TV
Remember way back when, a few summers ago, all over-the-air television broadcasts were changed from analog to digital? Didn't seem like much an event in retrospect. But imagine that event occurring in China, a country with 184 million cable subscribers, and it becomes much more of a sea change. China Digital TV is the company that stands to benefit the most: providing the smart cards necessary to unscramble TV signals, selling the software that cable operators need on their end, and collecting royalty fees on each box (a set-top box is needed for the smart card).

Market researchers estimate that by 2015, about 200 million smart cards will be needed, and China Digital has its hands all over this business. The company has healthy gross margins (79%, up from last year), over $200 million in cash, and zero debt. The upside here is enormous, so add China Digital to My Watchlist in order to get in on the action.

Power-One
Power One designs and manufactures power conversion and power solutions for renewable energy and communications markets. It has the No. 2 position in market share, despite only having entered the market in 2007. A lot of investors are concerned about the future of solar infrastructure, given declining subsidies and the current state of the EU. However, the company's inverters are also used for wind power, and no single company accounts for more than 10% of its business, so it's not overwhelmingly tied to the fortunes of companies like First Solar (Nasdaq: FSLR  ) or SunPower (Nasdaq: SPWRA  ) .

This is also a company with barely any debt hanging over its head, so it should be poised to pop, as it has done in the past. With shares trading at a dirt cheap P/E below 9, you'd be prudent to add this stock to My Watchlist.

Bridgepoint Education
With massive student debt and declining graduation rates, the for-profit education industry has gotten completely battered as of late. However, various Fool analysts think that Bridgepoint stands out from the crowd and deserves your attention. Forget the market-positive demographic trends -- unemployment at record levels, 67% of the population above the age of 25 lacking a college education -- as that's just the beginning. Bridgepoint has been able to massively increase the number of students at its universities while boosting revenue by 57% and net income by 170% over the last year.

Granted the current environment and potential Congressional backlash on for-profit educators is a real risk, but with $280 million in cash and zero debt, the company seems to be trading at an EV/EBITDA multiple of just 3 (that's crazy cheap!). Check out fellow Fool Andy-Louis Charles' recent article for more analysis, and then add it to your watchlist to get the latest news and commentary!

The Foolish bottom line
There's nothing wrong with investing in the big blue-chips of the world -- they offer safety, consistency, and can be profitable. But if you're looking for the next big thing -- the one or two investments that have the potential to drastically reshape your portfolio, then you've got to have exposure to small-cap stocks. The three above have illustrated their ability to reward shareholders, boost revenues, and they happen to be trading at rock-bottom prices. You better grab these stocks before everyone else!

Looking for other stocks to watch? Click here to get our brand new free report, "Six Stocks To Watch From David and Tom Gardner."

Jordan DiPietro owns shares of First Solar. Google is a Motley Fool Inside Value pick. First Solar, Google, and China Digital TV are Motley Fool Rule Breakers recommendations. Motley Fool Options has recommended a bull call spread position on Apple, which is a Motley Fool Stock Advisor choice. The Fool has written puts on Apple and owns shares of Apple, Bridgepoint Education, Google, Power-One, and SunPower. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (15) | Recommend This Article (118)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 18, 2011, at 4:43 PM, jimmy4040 wrote:

    I'm not very big in mixing morality with investing, but I'll make an exception Bridgepoint Education.

    Most of the for profit industry is a scam similar to the subrpime mortgage industry, and in fact you will find that many of those former mortgage salesmen are now recruiters for these "universities". Don't take my word for it though;

    “In the world of for-profit higher education, spectacular business success is possible despite an equally spectacular record of student failure,” (Senator Tom) Harkin said at the hearing. “Bridgepoint is a private company, but it is almost entirely dependent upon public funds … I think this is a scam, an absolute scam.”

    http://www.campusprogress.org/articles/sen._harkin_says_for-...

    Bridegepoint itself would be called a rollup in normal street language. it was started by a number of former U of Phoenix people and buys up existing online colleges. We know that U of Phoenix graduates less than 15% of it's students and exists mainly to suck up Federal grants and student loan money, not to educate students.

    As Andy Louis-Charles pointed out in an earlier MF post:

    "In five years, Bridgepoint has grown from approximately 322 students to 77,179"

    In my opinion, only a complete idiot would trust the financials put out by a company in that situation.

    I am very disappointed that the high standards of the Motley Fool have been subverted to allow promotion of such a bolier room type stocks.

  • Report this Comment On March 18, 2011, at 5:50 PM, WhidbeyIsland wrote:

    Too late! Things move faster and faster now. Everyone has already bought those three stocks, they have peaked and are starting to decline, and perhaps have been touched by scandal, thought don't take my word for it.

    Instead, I have three unreliable suggestions.

    Here are my three tips. Don't take my word for them. Consult a trustworthy advisor.

    <b>IMAG</b> (An imaginary company, only a gleam in its daddy's and mommie's eye). Get in before it is incorporated. However, make sure it will be at least $5 a share some day and listed on a solid stock exchange, in a country that is not in turmoil.)

    <b>PRED</b> (Also an imaginary company, possibly a spin off from Monsanto, and a product produced by genetic engineering, however perfectly safe, as long as you consult your doctor first and follow directions carefully.) This company will predict the future with absolute certainty and accuracy, except when it is wrong.

    <b>AFLAF<b> (An imaginary niche company.) It will produce warning devices, something like geiger counters, that will tell comedians when it is safe to make jokes about disasters.) CAUTION! This is a high-risk, speculative stock, and like this comment, may fall flat.

  • Report this Comment On March 18, 2011, at 9:37 PM, RickVBAGuy wrote:

    Do these foolish articles really affect trade volume that much?

  • Report this Comment On March 19, 2011, at 2:29 PM, fwhite590 wrote:

    ¿Its true that a private equity fund will buy 51% of the company a price of 7 dollars a share?

    that is a 100% gain.

  • Report this Comment On March 19, 2011, at 2:33 PM, fwhite590 wrote:

    SUBAYE

    ¿Is it true that a private equity fund will buy 51% of the company a price of 7 dollars a share?.

    That is 100% gain.

  • Report this Comment On March 19, 2011, at 3:05 PM, dontwin wrote:

    How about looking at Sea Drill? 7% dividend and future looks great. CEO just gave an extra $200 dividend based upon anticipated future earnings. Pur som sdrl in my foolx account!

  • Report this Comment On March 20, 2011, at 3:01 PM, rmarks1 wrote:

    How come China Digital's general administrative expenses went from 3M to 14M from 2006 to 2010? Sure gross went up from 30M to 87M - a factor of about 3, but with a decent structure the general expenses shoyld rise more much slowly.(Who is raking how much off what?)

  • Report this Comment On March 20, 2011, at 3:08 PM, rmarks1 wrote:

    I totally agree with jimmy40-40 comments on Bridgepoint Education. They exist to skim public funds with little intention to educate. It was a smart move to buy bankrupt physical campuses. They can show a real college with campus, sports teams, physical facilitates. But the Physical campus is only 3000 students, whereas on-line is 77 thousand.

    Would someone look at the type of on-line courses Bridgepoint offers: "Medical Administration" - are you telling me that 20,000 people are going to get decent jobs in that field. I think "Medical Administration" is a euphemism for receptionist. "Public Safety" - if you want to be a cop, you can go to many much cheaper Community Colleges - unless you are to stupid, in which case you are wasting your money because if you cannot get into community college, you are not smart enough to be a policeman. Oh I see, Bridgepoint trains mall security guards.

    They may make money, but it is immoral. May I suggest that Motley Fool should have some modicum of social responsibility and morrality with their recommendations.

  • Report this Comment On March 20, 2011, at 8:55 PM, techlvr11 wrote:

    PWER looks good on the surface but I have a question about cash flow.

    AR, AP and inventory went up sharply in 2010. Sure sales and NI doubled but the growth of AP, AR and inventory far outpaced that.

    It seems like company is manipulating cash flow and generating sales thru channel stuffing and financing by delaying payment to suppliers - both unsustainable practices.

  • Report this Comment On March 21, 2011, at 12:26 PM, mikecart1 wrote:

    My advice: don't invest in China stocks.

  • Report this Comment On March 25, 2011, at 11:38 AM, TruffelPig wrote:

    Right now I would second that - several China stocks have a T12 now on NASDAQ. I am extremly pessimistic on teh accounting quality.

  • Report this Comment On March 25, 2011, at 12:43 PM, Tealcosmo wrote:

    Looking at PWER, I see a huge 36% short interest. Is there some storm clouds on the horizon?

  • Report this Comment On March 25, 2011, at 12:51 PM, sjhstewart wrote:

    Warning signals went off in my so-called brain when I read about Bridgeport Ed. So I did a little research and must heartily agree with Jimmy4040 and rmarks1 - a scam waiting to be discovered. Your facts & figures are great, but choice of company is lacking.

  • Report this Comment On March 26, 2011, at 8:44 AM, MJByrne wrote:

    The article above has a box, "6 stocks you can’t afford to ignore!" I clicked on it and got one new stock added to my watch list but don't see the report for the other 5.

    Anyone else do this? Where's my report? Will I get an e-mail?

  • Report this Comment On April 27, 2011, at 12:42 PM, CyndyC wrote:

    No, China is a great place to put your money right now, strongly disagreeing w/ Mikecart1 and TruffelPig. I close to doubled my money on an Oberweis fund I bought about 5 years ago, and just cashed in almost half my current balance. The nation is still growing in volumes, and is investing heavily in other developing countries.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1460500, ~/Articles/ArticleHandler.aspx, 12/18/2014 1:28:20 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement