5 Top Micro-Cap Stocks

Hey there, Fools. We're back again to help you identify some of the most attractive microcap 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 you 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 Apple have more than 25 or 30 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. 

Drum roll, please ...
So without further ado, here are five CAPS stocks that sport a rating of four or five stars (out of five), have market caps between $100 million and $300 million, and that four or fewer professional analysts are covering.

Data from Yahoo! Finance and Motley Fool CAPS.

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, Denny's, China Green Agriculture, and Female Health might be worthy of your due diligence.

Bear's den
After failing to win seats on Denny's board in May, an activist investor group led by Oak Street Capital Management and Dash Acquisitions finally made headway earlier this month when Denny's decided to sack CEO Nelson Marchioli. Mr. Market continues to be skeptical about a turnaround, though; the shares are down more than 35% over the past three months. But with the stock trading at an enterprise value / EBITDA discount to family-style restaurant rivals DineEquity (NYSE: DIN), Darden (NYSE: DRI), and Cracker Barrel Old Country Store, Denny's looks like a special situation with significant upside.     

A few months ago, CAPS All-Star Jeffreyw summed up the opportunity:

The service has been marginal, the reputation a bit tarnished, stores and menu rather dated and management is in the doldrums. Perfect for a takeover and turnaround from the likes of [Steak n Shake] to reduce costs, eliminate unprofitable menu items and store locations, polish the brand and generate exciting new marketing with better quality food and improved service. 

Green light
Since April, shares of agricultural stocks like Monsanto (NYSE: MON), Mosaic (NYSE: MOS), and CF Industries have been slammed as much as 35%. Instead of jumping into those beaten-down biggies, though, China Green Agriculture, which produces humic-acid-based compound fertilizer, offers Fools a small and growing way to buy into the slumping sector. In its latest quarter, China Green Agriculture posted increases of 52% for revenue and 37% for net income, on strong demand for its high-margin products. And with a paltry PEG ratio of 0.36, investors aren't paying much for future growth.

Three months ago, CAPS All-Star tdomalley wrote about the bull case:

China has many mouths to feed and growing need for enhancing crop yields. Organic fertilizers help with this need. Company has lack of strong competition that should allow them to deepen moat over time. Government pressure to support "green" initiatives. Demonstrated tremendous growth. Excellent profit margins. Very little debt. Scalable future potential represents great value.

A nice dividend, too
Female condom maker Female Health recently completed the transition from its FC1 Female Condom to its lower-priced, higher-margin FC2 product, and the benefits are already being seen. In the company's most recent quarter, the first in which FC2 comprised 100% of its business, sales remained relatively flat while gross margins expanded 5% over the previous year. When you throw in the tasty dividend yield of 3.8%, rare for such a small company, it's not hard to understand our community's high opinion of the stock.

Two months ago, CAPS member StockEse summed it all up:

HIV/AIDS, other STDs, and unplanned/unwanted pregnancy are often linked to women's difficulty in negotiating condom use with partners. The female condom allows women to sidestep the negotiation entirely, taking matters into their own hands. ... [Female Health] has a huge potential market and could very well make enormous gains over time. ... Solid fundamentals, steady growth, no long term debt, and a recent pullback.

Are we on the same micro-wavelength?
But, of course, the real question is whether you believe these companies are real micro marvels or just small shrimps waiting to get 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 their discovery.