5 Top Microcap Stocks

Hey there, Fools. We're back again to help you identify some of the most attractive micro-cap stocks worthy of your investment dollars. Just as a reminder, we do this because:

1. Underfollowed micro-cap companies offer great returns -- and sometimes even the best returns.

2. Wall Street is covering fewer stocks than ever before, making now a great time to start looking for tiny treasures.

3. Micro-cap stocks can burn if you don't do your homework, so we try to shed more light on the asset class for you.

Microscopic surgery
This column uses our Motley Fool CAPS community intelligence database to turn up promising stocks. The system asks amateur and professional investors alike to rate stocks either "outperform" or "underperform." In turn, each investor is rated, as is each stock.

The end result is that while only huge companies like Intel (NASDAQ:INTC) have more than 15 or 20 analysts following them, CAPS harnesses the ideas of thousands to get at the long tail of the stock market with the same depth of coverage.

Drumroll, please ...
So, without further ado, here are five five-star CAPS stocks -- with market caps between $100 million and $200 million -- that three or fewer professional analysts are covering.

As always, don't view these stocks as hearty formal recommendations, but rather as appetizing starters for further analysis. Agreed?

Now that we have that settled, American Software and GenVec might just be two small wonders worthy of your Foolish due diligence.

One cheap American
Having to compete against multibillion goliaths like Microsoft (NASDAQ:MSFT) and SAP isn't exactly the optimal environment for a micro-cap company. Still, that hasn't stopped our CAPS community from making bullish calls on American Software, an Atlanta-based business solutions provider.

American has always generated consistent free cash and regularly posts free cash flow-to-sales margins in the mid-teens -- something I always love to see. Although sales growth has been virtually non-existent for American in the past decade, the company has paid a growing dividend in each of the last three years.

With about $70 million in cash and investments (and zero debt), American trades at just under three times cash per share. On top of that, the Fool's partner NetscribeSoftwre isn't very anti-American on the operational side of things:

Company's financial results indicate traction. Total revenues for the nine months ended Jan. 31, 2007 were $61.9 million or a 10% increase, compared to $56.2 million for the comparable period last year. Company's operating earnings increased by 38%, indicating margin expansion.

Going through a small phase
GenVec, a Maryland-based biopharmaceutical company, is another stock in the long tail that piques the interest of our CAPS players. Specifically, our community likes the progress GenVec is making with its lead product, TNFerade (TF). Currently, TF is in a pivotal phase 2/phase 3 study on advanced pancreatic cancer, while phase 2 trials are being conducted for melanoma and rectal cancer.

Of course, we're talking biopharm here, so Fools shouldn't expect the numbers to be pretty. Management believes revenues will drop once again in 2007 and expects to burn an additional $5 million of cash to support TF's trials. So, in this Fool's opinion, GenVec is definitely meant for more speculative spirits.

However, with several key relationships that give GenVec unique sources of funding -- like with the Vaccine Research Center, U.S. Navy, and Department of Homeland Security -- the stock might be a tilted bet worth considering. CAPS All-Star pennysplants succinctly sums it up:

Stellar management. High Insider ownership. Good progress on vaccines and wet amd (age-related macular degeneration). Good collaborations with Gov't, universities, and Pharma. Contracts and milestones for vaccines. Keeping rights to therapeutics.

Are we on the same micro-wavelength?
But, of course, the real question is whether you believe these companies are real micro marvels or small shrimps waiting to be squished. Log on to CAPS and let us know how you feel.

It's absolutely free and, within seconds, you'll have access to thousands of potential stock ideas. Join now -- more teeny, tiny treasures await.

For more CAPS coverage:

• 5 Stocks Lowering Guidance
• 7 Highly Rated Stocks on Sale
• 5 More Top Growth Stocks

Fool contributor Brian Pacampara owns no position in any of the companies mentioned. Intel and Microsoft are Motley Fool Inside Value choices. The Fool's disclosure policy is never too small to be seen.