5 Top Microcap Stocks

Hey there, Fools. We're back again to help you identify some of the most attractive microcap stocks worthy of your investment dollars. Just as a reminder, we do this because:

1. Underfollowed microcap 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. Microcap stocks can burn you 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 and each stock get rated, too.

The end result? While only huge companies such as Home Depot (NYSE: HD  ) 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 five-star CAPS stocks -- with market caps between $100 million and $200 million -- that four or fewer professional analysts are covering.

Company

Market Cap

Total CAPS users

Analysts

Current Analyst Recommendation

IONA Technologies (Nasdaq: IONA  )

$200M

18

Four

Buy

Aastrom Biosciences (Nasdaq: ASTM  )

$167M

22

Four

Buy

Gaming Partners International (Nasdaq: GPIC  )

$154M

54

Four

Buy

GP Strategies (NYSE: GPX  )

$147M

27

Three

Strong Buy

21st Century Holding (Nasdaq: TCHC  )

$142M

220

One

Strong Buy



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, Gaming Partners and 21st Century Holding might just be two small wonders worthy of your Foolish due diligence.

Microchipped microcap
One of my favorite things about small companies is that many of them fill an obscure business niche that generally goes unnoticed. Gaming Partners International, one of the gaming industry's leading supplier of radio-frequency identification (RFID) chips, seems to be one of those firms. RFID technology can prevent thieves from exiting the casino with stolen chips, track the bets of players for suspicious patterns, and assist dramatically in the auditing process.

The technology has been around for a while, but a favorable approval by the FCC allowing the more potent 13.56MHz chip to be used in casinos -- as opposed to the older 125KHz version -- has given RFID a boost lately. Certain applications, like having sensors at the doorways, were not possible with the weaker microchip. Thus, Gaming Partners' products are steadily gaining acceptance by top international casinos such as Wynn in Las Vegas, Holland Casino, and Crown Macau. For the latest quarter, the company reported a 400% increase in net income and a 50% increase in revenues, and expects demand to remain strong going forward.

Here are two CAPS gamers who have pushed their microchips into the pot:

  • hlacheen: "Solid company with great management. Insiders own well more than half of the company's common stock. I definitely suggest reading the annual report, as it provides an abundance of straight-forward information about the company and its businesses."
  • stillwater9999: "It appears that the RFID chips made by this company are beginning to see some serious adoption by some Casinos ... Tracking the chips by casinos offers many advantages including reduction in counterfeiting. Gambling is still very much on the rise worldwide."

Into the 21st Century
21st Century, an insurance holding company, is another stock in the long tail that has our CAPS community excited. The Florida-based insurer has been overwhelmed by claims regarding the massive hurricanes of a few years back, but CEO E.J. Lawson believes 2007 will be a blowout year. On the back of positive weather patterns for the upcoming hurricane season, as well as recently enacted insurance legislation -- designed to stabilize insurance rates in Florida, but which should also lower 21st Century's reinsurance costs -- Lawson expects earnings to be in the vicinity of $4.50 per share in 2007.

That would make 21st Century's stock available at around 4 to 5 times forward earnings. Add 21st Century's strong balance sheet and insiders' 15% stake in the company, and it's easy to see why our CAPS contestants have a rosy outlook on the 21st Century:

  • Patrick6k: "21st Century Holding Company is another solid company with good management selling at a good discount to the overall market at the moment. They have low debt, good cash flow, good inside ownership, and nice margins all around."
  • TrulyJQ: "TCHC's biggest negative is how levered it is to Florida hurricanes. If we avoid a year like Katrina, this stock will shine, as its earnings are right now. Dividend recently hiked, inside ownership, and low float with 30% growth forecast and a 5.10 forward P/E are all why the stock needs to be bought and held for a double."

Are we on the same micro-wavelength?
Of course, the real question is whether you believe these companies are real micromarvels or small shrimps waiting to 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.

For more CAPS coverage:

Fool contributor Brian Pacampara never uses his chips to buy insurance at the blackjack table. He owns no position in any of the companies mentioned. Home Depot is a Motley Fool Inside Value pick. The Fool's disclosure policy is never too small to be seen.


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