3 Small Caps With Room to Run

If you're satisfied with mediocre returns or just collecting dividend payments, then there's nothing wrong with avoiding small-cap stocks. However, if you're looking for a true home run -- a stock that can double, triple in value -- then small-cap stocks are where it's at.

It has been well-documented that small-cap stocks outperform their mid- and large-cap brethren. Wall Street institutions are just too busy and conservative to waste their time with companies in the hundreds of million dollars, so with a shortage of eyes combing through long annual reports, you're much more likely to find a price that's off. And that's why you, as an individual investor, have a huge advantage over those pesky Wall Street analysts.

To try to find the most promising small caps out there today, I ran a screen that returned more than 300 companies. I sorted my screen for companies trading for less than a P/E of 12, a return on equity (ROE) greater than 15%, and those that have been able to increase revenue over the past five years by at least 20% annually. In addition, the company had to be worth less than $1 billion to qualify as a small cap. Here are three stocks I think are worth looking at:

Source: Capital IQ, a division of Standard & Poor's. *Compound annual growth rate.

Will shipping get a boost?
The Baltic Dry Index (BDI) has been hitting record lows recently, typically foreshadowing a difficult period for companies like Excel Maritime that ship dry goods -- iron ore, coal, grain, and fertilizer, for instance. However, dry-bulk shippers have been shrugging off the slump. You wouldn't know it from looking at a stock chart (Excel Maritime stock has fallen 23% in three months), but the company had a pretty good first quarter. Adjusted EBITDA increased by 16%, and Excel Maritime reported yet another quarter of positive earnings, with an adjusted EPS of $0.11. In addition, it was able to pay down debt and secure enough financing for capital spending needs in the upcoming year. Although Excel Maritime isn't expected to grow as fast as competitors Genco Shipping (NYSE: GNK) or DryShips (Nasdaq: DRYS), its dirt cheap valuation makes it an appealing play in the sector.

Another way to play alternative energy
When most people think of investing in alt-energy, they think of big names like First Solar or Vestas Wind Systems. These companies are great, but what about looking a bit below the surface at the suppliers -- the ones that provide parts and equipment that allow the big-timers to play in the solar and wind game?

Let me first introduce you to Fuel Systems, a company that designs and manufactures parts for alternative fuel devices -- things like fuel injectors and flow-control valves. Fuel Systems' customer base ranges from service companies like National Oilwell Varco to oil and gas majors like Chesapeake Energy. It's not the most exciting or pretty business, but growing revenue every year by 36% on average isn't something to sneeze at, especially when you're able to translate those sales into earnings. Over the past half decade, Fuel Systems has boosted its EBITDA by an annual rate of 184%, and analysts expect this small cap to keep trucking along with more than 16% earnings growth over the next five years.

Advanced Battery Technologies makes rechargeable polymer lithium-ion batteries -- also not terribly exciting -- but it also manufactures electrical bikes, scooters, and sport utility vehicles. And it had one heck of a first quarter: Revenue increased by 83% and net income jumped by 85% as the company benefited from strong electric vehicle demand and higher margins on its larger-capacity batteries. This is impressive enough, but especially so when comparing it with peer A123 Systems (Nasdaq: AONE), which reported a gross loss of $2 million for the quarter.

The Foolish bottom line
It's always smart to do your own due diligence, especially when evaluating small-cap stocks, which are typically more volatile than billion-dollar companies.

On the surface, though, these three stocks seem like they may be poised to pop, so check them out and feel free to leave us your thoughts in the comments section below.