There may be a sense of safety in size, but many times investors will make some of their best returns by looking at small-cap stocks. While a rising tide can lift all boats, the smaller runabouts can grow much faster.
22nd Century Group (XXII 0.00%), Willdan Group (WLDN -5.15%), and EnviroStar (EVI) are three companies that did just that, taking a modest investment of $8,000 and, in just five years' time, turning it into a colossal $104,000 return or more.
22nd Century Group (5-Yr. Total Return: 1,570%)
Plant biotechnology company 22nd Century Group could end up as a case of being in the right place at the right time. The FDA is considering requiring tobacco companies to dramatically lower the amount of nicotine contained in their cigarettes to negligible levels, a move that could wipe out their profit centers. The potential for steep regulation has caused Philip Morris International (PM 0.99%) to actually decide a "smoke-free future" is in its best interests, and it's trying to get people to quit smoking and use its heat-not-burn tobacco technology instead.
22nd Century Group could have the solution, though, as its Brand A cigarettes contain 95% less nicotine than conventional tobacco cigarettes. It's able to achieve that through genetic engineering and plant breeding. It could be a huge boon for the biotech or a tobacco giant that chose to buy it out. British American Tobacco (NYSEMKT: BTI) entered into a research license agreement with 22nd Century several years ago.
The problem is, you're buying into a concept, not a company yet. It's subsisting on sales of traditional cigarettes in small volumes; the exciting stuff, its reduced-risk cigarettes and smoking cessation products, have yet to gain FDA approval -- and there's no guarantee they will, or even if 22nd Century will pursue that.
An $8,000 investment in 22nd Century Group may have resulted in a return of $125,600 over the last five years as investors gambled on its growth, but it could have just as easily turned into a pile of ash. This is a stock that is much too risky to take a flier on.
Willdan Group (5-Yr. Total Return: 2,040%)
Unlike the previous company, energy efficiency expert Willdan Group is a thriving business with real revenues as it wins contracts from various utilities, public agencies, and private industry throughout the country to provide consulting work or technical expertise. Total contract revenue jumped 22% last quarter to $72 million, helping to generate net profits of $3.3 million, or $0.36 per share. It's looking for full-year total contract revenue of $250 million to $260 million and earnings of $1.08 to $1.21 per share and believes it can generate revenue growth of 20% annually over the long term.
Recently, Willdan acquired for $30 million Integral Analytics, a data analytics and software company, to expand its offerings to electric utilities as the industry expands into alternative and renewable energy sources. Integral Analytics specializes in data analytics to help utility managers evaluate, plan, and dispatch electricity resources more effectively.
As the grid becomes increasingly overloaded, the efficient planning of power usage will be greatly needed. IA's customers include municipal systems and some of the largest investor-owned utilities in North America, with its applications used by utilities in regulatory proceedings in more than 30 states.
Strategic acquisitions like that will help Willdan Group continue growing and help explain why an $8,000 investment in the consulting and technical application firm would have grown into a $163,200 return.
EnviroStar (5-Yr. Total Return: 2,680%)
EnviroStar is trying to clean up by cleaning up. It distributes commercial, industrial, and vended laundry and dry cleaning equipment, as well as steam and hot water boilers to its 9,100 customers throughout the U.S., Canada, the Caribbean, and Latin America. The benefit of its dry cleaning equipment is its environmental friendliness, in that it doesn't use perchloroethylene in the dry cleaning process.
According to OSHA, "perc" has long been recognized as an effective dry cleaning solvent and is by far the most commonly used solvent in dry cleaning shops, but it also poses potentially serious health hazards if exposure is not properly controlled. Dry cleaning workers who routinely breathe excessive amounts of the solvent vapor or spill perc on their skin are at risk of developing health problems.
While EnviroStar's machines align well with the company name, it also plans on embarking on a risky growth-by-acquisition strategy, or what it calls its "buy-and-build" strategy. This includes its recently completed acquisitions of Western State Design and Martin-Ray Laundry Systems, two distributors of commercial and industrial laundry equipment.
EnviroStar may have turned $8,000 into $214,400 in five years' time, but investors might be taken to the cleaners if the acquisition strategy goes awry, which often happens when companies try to roll up the industry under one roof.