Traditionally, when a market hits bottom and finally starts to recover, micro-cap stocks lead the way with eye-popping returns. That's great news for investors who put their money behind the little guys.
Unfortunately, the flip side is that when the market starts to swoon, micro caps usually lead on the way down, too.
Don't believe me?
In the past two months, the S&P 500 is down roughly 12%, but the five stocks that I'm about to introduce to you are down an average of about 30% over the same time period.
This type of volatility is inherent in micro-cap investing. If you have the resolve to hold on tight through the market's vagaries, then these five stocks -- which have all been bought and held by our crack team of Rising Stars -- might be just right for you.
If you add these stocks to your watchlist, you'll receive up-to-date information on them all. Read all the way to the end, and you'll get a chance for a report that highlights two companies that the government won't let fail.
Without further ado, our analysts' five micro-cap picks...
When I hear "Pittsburgh," I think "steel." In this case, the word association works out nicely. "Ampco-Pittsburgh is the largest producer of equipment used in making cold-rolled steel, a niche type of steel used primarily in construction and in automotives," says Alex Pape, who added the company to his portfolio back in February.
What gets Alex particularly amped about this niche play is that it's getting more involved in China -- which has been the driving force behind steel production for the past five years. "The company has been selling rolls to Chinese steel manufacturers for years, but more exciting to me is the company's joint venture with the fifth-largest Chinese steel producer to begin producing rolls in China," he says.
- Add Ampco-Pittsburgh to My Watchlist.
It doesn't get much more boring than dealing with laundry stocks, and that's one of the reasons Michael Olsen bought Mac-Gray. "Don't be fooled by their humdrum image. I've learned that effectively operated laundromats, in apartment buildings or as independent businesses, can be venerable cash machines," Olsen says.
Olsen also highlighted three catalysts to boost the stock moving forward: activist pressure from shareholders, shareholder-friendly moves (likely in response to said pressure), and improving profitability. Any one of these could send the stock upward, but put together, Michael thinks they present a compelling case.
- Add Mac-Gray to My Watchlist.
Houston Wire & Cable
Jason Moser argues that "our smartphones, laptops, and the Internet all come sans cables these days, but it all has to start somewhere." And that somewhere, argues Jason, is with Houston Wire & Cable.
The company provides the type of wiring, cable, and customer service needs that almost every industry requires. Jason argues that upgrades to the country's wired networks are inevitable, and Houston Wire & Cable is in the sweet spot to benefit. "From wastewater and mass transit to energy and steel and everything in between, Houston Wire's services will be called on in some capacity," he says.
- Add Houston Wire & Cable to My Watchlist.
This micro cap was the choice of not one, but two Rising Star analysts! The company provides energy solutions for utility providers and their customers, usually in strategically lowering demand when the most strain is being put on energy grids.
Rising Star leader Alyce Lomax believes that the solutions EnerNOC offers will be vital in coming years. "The North American Reliability Corporation tells us that demand for electric power will increase by 19% in the U.S. in the next decade, but generation capacity is only expected to increase by 12%," she says.
A week earlier, Dan Dzombak tagged EnerNOC as well. He boiled down the reasons for his buy to three simple factors: EnerNOC is a growing business in a new market, it has a strong balance sheet, and its price is beaten down.
- Add EnerNOC to My Watchlist.
Finally, we go back again to Alyce, who picked this alternative oil producer for her portfolio back in July. Solazyme uses its patented micro-algae to produce oil by using feedstock as simple as sugar cane or forest rubbish.
The company already has partnerships in place with big-time names like Whole Foods
- Add Solazyme to My Watchlist.
These two can't fail
If investing in micro- and small-cap stocks is for you, then hopefully this article gave you a great starting spot for your own due diligence. If you'd like two more small-cap ideas, I'm willing to offer you access to The Motley Fool's special free report: "Too Small to Fail -- 2 Small Caps the Government Won't Let Go Broke."
Inside, you'll get all the details on two small-cap stocks that have solid deals with the government and have the potential to deliver multibagger returns. The report is yours today, absolutely free!