5-Star Stocks Poised to Pop: Smith Micro Software (CSCO, GOOG, IBM, MSFT, SMSI)

5-Star Stocks Poised to Pop: Smith Micro Software

Based on the aggregated intelligence of 170,000-plus investors participating in Motley Fool CAPS, the Fool's free investing community, mobile software specialist Smith Micro Software (Nasdaq: SMSI ) has earned a coveted five-star ranking.

With that in mind, let's take a closer look at Smith Micro's business and see what CAPS investors are saying about the stock right now.

Smith Micro facts

Headquarters (Founded)	Aliso Viejo, Calif. (1982)
Market Cap	$339.2 million
Industry	Application software
Trailing-12-Month Revenue	$118.7 million
Management	Co-Founder/CEO William Smith, Jr. CFO Andrew Schmidt
Return on Equity (Average, Past 3 Years)	1.6%
Cash/Debt	$54.85 million / $0
Competitors	Microsoft (Nasdaq: MSFT ) Cisco Systems (Nasdaq: CSCO )

Sources: Capital IQ (a division of Standard & Poor's) and Motley Fool CAPS.

On CAPS, 97% of the 828 members who have rated Smith Micro believe the stock will outperform the S&P 500 going forward. These bulls include TheBlindCat and CraigMiles.

In August, TheBlindCat tapped Smith Micro as a way to get exposure to a pair of tasty tech tailwinds: "A good play on Mobile and Cloud Computing. Explosive growth in both areas and Smith Micro has been in the thick of it from the beginning."

Smith Micro's smallish size, rock-solid balance sheet, and exposure to exciting sources of growth continue to support its five-star CAPS status. In fact, Smith Micro's compound revenue growth over the past five years (55.5%) easily tops that of behemoth rivals Microsoft (9.4%) and Cisco (10.1%), as well as other high-profile cloud-computing plays like IBM (NYSE: IBM ) (0.2%) and Google (Nasdaq: GOOG ) (42.4%). More importantly, with a PEG of just 0.7 -- representing a discount to each of those same stocks -- Smith Micro's future growth seems reasonably priced.

Last month, CAPS member CraigMiles seemed baffled over Smith Micro's cheapish valuation:

I can find no reason for it. [Smith Micro] has ...

1) Cash Flow and growth to be valued at $10 per share with an 11% discount rate.
(I can't imagine a software company having a high weighted average cost of capital)
2) No debt
3) [19%] insider ownership
4) Revenue is still growing per year
5) [Free cash flow] is growing per year

What's the big deal?!

What do you think about Smith Micro, or any other stock for that matter? If you want to retire rich, you need to put together the best portfolio you can. Owning exceptional stocks is a surefire way to secure your financial future, and on Motley Fool CAPS, thousands of investors are working every day to find them. CAPS is 100% free, so get started!

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Fool contributor Brian Pacampara owns no position in any of the companies mentioned. Microsoft is a Motley Fool Inside Value pick, and Motley Fool Options has recommended a diagonal call position on it. The Fool owns shares of Microsoft and has written calls (bull call spread) on Cisco. Try any of our Foolish newsletter services free for 30 days.

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. The Fool's disclosure policy always gets a perfect score.

Comments from our Foolish Readers

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Report this Comment On October 12, 2010, at 9:21 PM, DrGPSchneyer wrote:

I have been a stockholder of SMSI for several years now (only partially, by choice) and believe that I know why the stock has done very little while the company has done very well:
My view is that Dr./Mr. Smith runs the company for the benefit of his management team and himself, ignoring the interests of non-employee stockholders. In my opinion, he drains the "profits" generated by the rapidly increasing sales (which sales even increased in the 2008-2010 period when sales increases were rare) via outsized salaries, bonuses, and stock options/rewards to his team. The resulting paucity of earnings/share, and the likelihood that such will continue because he has ignored shareholder criticisms, dampens interest in the stock. The fact that he and his team also sell much of their awarded stock each quarter also damps down the price. The result is that most non-employee stockholders trade the stock's large up and down moves, rather than investing in it.
I think that it is sad because Dr. Smith and his team appear to have done a superior job in building a fine company, but apparently want all the benefits for themselves, as though it were a non-public company.
Report this Comment On October 14, 2010, at 1:52 PM, p0110ck wrote:

the solution is simple. SMSI shows a P/E ratio of ~60. This puts a downward pressure on the stock price. If the P/E is calculated using non GAAP earnings - i.e. ignoring options expensing, the P/E computes to a low single digit number. SMSI's stock got trashed in the first earnings report that included OE in Q3 2007 when it had been at ~ $16 and never recovered in spite of continuous revenue growth and great cash flow. Purely and simply, options expensing misleads investors - particularly emerging small cap companies such as SMSI - making them look kike they're failing when they are actually doing great. When are we going to wise up and blow this stupid rule out of the water.
Report this Comment On November 08, 2010, at 2:31 AM, TheBlindCat wrote:

Looking like you called that one right, Brian. SMSI just blew past AKAM, AAPL and LLNW as my all time top performing pick.

updated 2 days ago Sponsored by:
	DOW	12,454.83	-74.92	-0.60%
	S&P 500	1,317.82	-2.86	-0.22%
	NASD	2,837.53	-1.85	-0.07%

MSFT	$29.06		-0.01	-0.03%
Microsoft Corp		CAPS Rating:

SMSI	$1.62		+0.02	+1.25%
Smith Micro Softwa…		CAPS Rating:

IBM	$194.30		-1.79	-0.91%
International Busi…		CAPS Rating:

CSCO	$16.33		-0.06	-0.37%
Cisco Systems, Inc…		CAPS Rating:

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5-Star Stocks Poised to Pop: Smith Micro Software

Comments from our Foolish Readers

Report this Comment On October 12, 2010, at 9:21 PM, DrGPSchneyer wrote:

Report this Comment On October 14, 2010, at 1:52 PM, p0110ck wrote:

Report this Comment On November 08, 2010, at 2:31 AM, TheBlindCat wrote:

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