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Big companies valued in the tens or hundreds of billions of dollars get most of the attention, but small-cap stocks shouldn't be overlooked. Often with little analyst coverage and scant interest from investors, some of the best bargains can be found among companies worth less than $1 billion. Small-cap stocks can be risky, and investors should always have a good understanding of the underlying company before risking their hard-earned dollars. To that end, three of our contributing writers have some great small-cap ideas for August.
A dominant market share and a fortress balance sheet
Tim Green: I recommended semiconductor equipment vendor Kulicke & Soffa Industries (KLIC 1.85%) as my top small-cap stock to buy in 2016, and I'm recommending it again in August. The stock is up year to date, but I think it's still a great small-cap value.
Kulicke & Soffa sells semiconductor packaging equipment, with its core business being wire-bonding equipment. The company also entered the advanced packaging market with its 2014 acquisition of Assembleon, giving it exposure to the fastest growing portions of the semiconductor packaging equipment market. Kulicke & Soffa had a 70% share of the wire-bonding market in 2012.
Because the semiconductor equipment market is cyclical, Kulicke & Soffa's revenue and profits tend to fluctuate along with demand. Over the past decade, the company has posted an operating loss during two years, fiscal 2008 and 2009. Net income peaked at $161 million in fiscal 2012, and over the past 12 months the company generated $40 million in net income.
With a market capitalization of around $890 million, Kulicke & Soffa may not seem all that cheap, especially given how much its profits can swing up and down. But the company's balance sheet is flush with cash. At the end of the company's latest quarter, it had $482 million of cash and no debt. That works out to about 54% of its total market capitalization. Backing out that cash, Kulicke & Soffa trades at about 10 times its trailing-12-month earnings.
Kulicke & Soffa's results will undoubtedly be volatile going forward, but for investors that can stomach some ups and downs, the stock looks like a small-cap bargain.
An underappreciated growth story
George Budwell: Shares of the Irish biopharma Amarin Corp. (AMRN +2.48%) are currently trading at less than 2.5 times the company's projected 2017 revenue. The catch is that the market is deeply concerned that the interim data readout of the ongoing cardiovascular outcomes trials for the drugmaker's highly refined fish oil pill, Vascepa, will be a disaster. Per Amarin's latest update, this pivotal catalyst should come to pass by no later than October of this year.
I think these concerns are overblown and that the stock is a strong buy heading into the company's second-quarter earnings release, scheduled for Aug. 4. The fact of the matter is that the scientific debate over whether omega-3 supplementation reduces the risk of adverse cardiovascular events is far from resolved, and the published studies on the matter paint a mixed picture at best, making it impossible to draw any solid conclusions just yet.
The good news is that prescription omega-3 treatments like Vascepa have been shown to drive marked improvements in several disease biomarkers in patients with elevated triglyceride levels. As such, I'm cautiously optimistic that Vascepa will prove to be an important new weapon in the fight against heart disease, and eventually generate blockbuster sales as a result.
Small player in a big growth market
Jason Hall: One of the biggest secular trends happening today is the ongoing retirement of the baby boomer generation, with an average of around 10,000 boomers retiring every day over the next decade. With this comes a need for more long-term care and rehab facilities than are currently open. CareTrust REIT Inc. (CTRE +1.72%) is set to take advantage of that trend in a big way, and with a market capitalization of just over $800 million, this small-cap stock has huge long-term potential.
This potential is twofold. Not only is CareTrust a strong potential growth stock, but it's also likely to be a fantastic income growth stock. As of this writing, CareTrust owns 148 healthcare and senior housing facilities, or roughly 50% more than it had when it was taken public two years ago.
There's risk because of CareTrust's small size, in a large market with bigger, better-capitalized competitors. But management says its small size is an advantage, since it can benefit from smaller acquisitions -- such as a recent $7 million acquisition of a small skilled-nursing facility in northern California -- that its bigger peers wouldn't even consider.
But even with the risk that it gets drowned in a big pond, the opportunity to profit from capital and dividend growth over the next decade-plus, puts CareTrust REIT high on my list of small-cap stocks to buy this month.
