Several analysts have started calling an imminent end to the current bull market, citing Europe's tumultuous debt woes, Japan's recession, and the end of the Fed's bond-buying program, among the myriad reasons.
All of these factors "signal a slowdown in the pace of equity gains that may, in a worst-case scenario, result in a decline of as much as 20%," according to Robert Holmes at TheStreet.
"There has also been a shift in leadership, another potential sign of an impending market swoon. Lower-quality stocks led the equity market higher until about a month ago. Both the Russell 2000 and the S&P 500 ($INX) are up 6% this year‚ a far cry from bear-market territory, but the small-cap index is down 2% over the past month as the S&P 500 has held steady."
So what does all this mean for small-cap investing ideas? And more importantly, how can you manage your portfolio's risk exposure during this uncertain time?
Brian Peery, a portfolio manager at Hennessy Cornerstone Growth Fund, doesn't seem too concerned about the bears' doomsday predictions. "It's not about timing the market, it's about time in the market," he said in a recent interview.
"I've never been good at picking tops or bottoms. I'm going to invest for the long term, so I want to pick high-quality companies that are going to be around in five years and make sure I'm not paying too much for them."
His message: If you can separate the individual companies and their performance from the overall economy, there are plenty of good opportunities for long-term investors, regardless of the near-term market fluctuations.
Which is why we chose to focus on small-cap companies that have proven themselves to be more profitable than their competitors. Because the more profitable a company, the greater its capacity to stay strong during times of economic distress -- well, at least in theory.
A word of warning though -- past performance is no guarantee of future results. Just because a small-cap company proved itself to be more profitable in the past, doesn't mean it will continue to outperform in the future.
That's why we narrowed down the list to only focus on small-cap companies that have been backed up by insider buying over the last six months. If insider executives are using their own money to buy the shares of their employers, you'd better pay close attention.
Insiders think these profitable small-cap names have long-term potential -- do you think these stocks can ride out the near-term market volatility? Use this list as a starting point for your own analysis. (Click here to access free, interactive tools to analyze these ideas.)
1. ChinaCast Education (Nasdaq: CAST): Education & Training Services Industry. Market cap of $285.74M. Over the last six months, insiders have been net buyers of 317,802 shares, which represents about 0.91% of the company's float of 34.87M shares. Trailing 12 month (TTM) gross margins at 67.54% vs. the industry average at 52.89%. TTM operating margin at 31.62% vs. the industry average at 19.84%. TTM pre-tax margin at 23.11% vs. the industry average at 16.09%.
2. Rockville Financial (Nasdaq: RCKB): Regional Bank. Market cap of $280.64M. Over the last six months, insiders have been net buyers of 92,070 shares, which represents about 0.33% of the company's float of 27.97M shares. Trailing 12 month (TTM) gross margins at 69.48% vs. the industry average at 55.48%. TTM operating margin at 38.1% vs. the industry average at 28.45%. TTM pre-tax margin at 15.11% vs. the industry average at 10.71%.
3. Shuffle Master (Nasdaq: SHFL): Diversified Machinery Industry. Market cap of $578.12M. Over the last six months, insiders have been net buyers of 10,000 shares, which represents about 0.02% of the company's float of 53.08M shares. Trailing 12 month (TTM) gross margins at 70.96% vs. the industry average at 36.78%. TTM operating margin at 19.32% vs. the industry average at 18.23%. TTM pre-tax margin at 15.84% vs. the industry average at 15.59%.
*Profitability data sourced from Fidelity, insider trading data sourced from Yahoo! Finance. Data sourced on Friday afternoon, May 27.
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research. Note: The numbers on top of items represent the forward P/E ratio, if available.
Kapitall's Eben Esterhuizen does not own shares of any companies mentioned.
