It's hard to find hidden gems that could become "multibaggers" in today's stock market. But if we focus on small cap stocks in lesser-known industries with weak analyst coverage, we can still find a few stocks that are quietly rallying away from the media spotlight.
Alpha and Omega Semiconductor
Alpha and Omega Semiconductor develops a portfolio of power semiconductors. Its two main categories of products -- power discretes and power ICs (integrated circuits) -- are widely used in smartphones, PCs, TVs, LED lights, battery packs, servers, motor controls, and telecom equipment. The California-based company sells most of its products to distributors in Asia, which sell those products to end customers across the world.
Only three Wall Street analysts cover Alpha and Omega, which has a market cap of about $500 million. Yet the stock has quietly rallied nearly 140% this year, thanks to accelerating year-over-year sales growth over the past three quarters. Its revenue rose 20% annually to $97.4 million last quarter, compared to 12% growth in the previous quarter. Gross margin also rose 400 basis points annually to 22.5%, and its bottom line rose from a net loss of $2 million to a net profit of $3.3 million. That growth was driven by an increased market demand for more power-efficient devices.
The analysts expect Alpha and Omega's revenue to rise 10% and earnings to improve fourfold this year. The stock might look pricey at 209 times earnings, but its price-to-sales ratio of 1.4 and forward P/E of 32 both suggest that it still has room to run.
PDF Solutions, which has a market cap of $725 million, provides infrastructure technologies and services for IC makers. Its solutions -- which include software, test chips, wafer test systems, and other services -- help manufacturers maintain the quality of IC chips while boosting their yields. Demand for these services is rising alongside surging market demand for IC chips across multiple industries.
PDF's double-digit annual sales growth over the past two quarters caused the stock to rally over 110% this year. Its revenue rose 14% annually to $27.3 million last quarter, but its non-GAAP earnings dipped 7% to $5.4 million on higher R&D expenses. PDF is covered by just four analysts, who estimate that its sales will rise 10% this year while its non-GAAP earnings will fall 15%.
Unlike Alpha and Omega, PDF's upside seems limited. It trades at 86 times trailing earnings, 27 times forward earnings, and 7 times sales. Those valuations look lofty compared to its growth estimates.
KEMET Corporation creates passive electronic components like solid, film, and electrolytic capacitors. Its main customers include OEMs in the PC, communications, automotive, consumer, industrial, military, and aerospace industries. Only three analysts currently cover KEMET, which has a market cap of $300 million, but its stock has rallied nearly 170% over the past year.
KEMET's sales rose just 0.6% annually to $187.3 million last quarter, but that represented its first year-over-year growth in two years. Its net loss of $5 million represented a big decline from a profit of $7.2 million a year earlier, but that loss was mainly caused by a writedown of long-lived assets of $6.2 million and restructuring charges of $4 million. Looking ahead, analysts expect KEMET's revenue to improve 1% this year, but for its earnings to more than double.
KEMET's growth doesn't look exciting, but it's riding the same supply chain tailwinds which are lifting Alpha and Omega and PDF Solutions. Moreover, the stock's P/S ratio of 0.4 makes it a deep value play and potential takeover target for bigger tech companies.
Should you buy these three stocks?
Out of these three stocks, Alpha and Omega looks like the best long-term bet. KEMET looks like a decent value play, but its anemic sales growth doesn't inspire much confidence. PDF looks like the worst play, since its growth doesn't justify its high valuations.
Investors should also remember that small cap stocks have more upside potential than larger stocks -- but they can also be more volatile due to low trading volumes and sparse media coverage. Therefore, investors should exercise caution when buying these lesser-known tech stocks.
Leo Sun has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.