Over the past month, I've had numerous friends ask me the same old question: "Should I buy shares of Apple
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 |
$353.5 |
46.1% |
15.5% |
10.6 |
|
Power-One |
$775.5 |
32% |
66.8% |
7.5 |
|
Bridgepoint Education |
$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
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."
