Here's a warning from the FWA (Fool Watchlist Association): If you have a weak heart, click away now! I propose to open the book on micro caps and suggest three potential winners from a sea filled with hundreds of companies likely destined to fail.
Micro caps often have spotty analyst coverage at best, dicey corporate track records, and high implied risk -- thus they are not for the faint of heart. But just as we can find values in small-, mid-, and large-cap segments, there look to be potential values locked up in micro caps as well. You just have to be even more discerning than normal regarding your criteria. Though these are by no means buy suggestions, they are breaking the surface on what could be some truly stellar companies.
NetSol is an application software company that provides point-of-sale, enterprise information, and credit processing systems to the automotive, health care, and financial sectors. As imagined, the recession took a toll on the company's financial and automotive segment, yet it's been profitable in the past five quarters. In its most recent quarterly filing, NetSol delivered 21% revenue growth, a profit that tripled over the year-ago period, and it grew its gross margin by 130 basis points from a year earlier. NetSol is trading at a paltry 8.4 times the low end of its own 2011 guidance, and for that reason alone it should merit further research.
Mad Catz Interactive
FSI is riding the coattails of success from other semiconductor equipment giants Applied Materials and KLA-Tencor, but that in no way diminishes the blazing growth rate FSI has put up over the past two years. Last year, revenue leapt 80% as the company turned a loss of $0.57 from the previous year into a profit of $0.39. In 2011, FSI is taking a bit of a breather, but its 2012 estimates point to robust growth once again. The company is trading at a minuscule 7.3 times 2012 earnings and has a squeaky-clean, debt-free balance sheet. It bears further research!
State your case
Which of these three potentially undervalued micro caps is your favorite? Perhaps you have your own favorite that I didn't mention here? What I do know is we'll never be able to find the next Cisco Systems unless we take off our gloves and do a little research -- and personally, my research starts with adding these stocks to our free new My Watchlist service:
Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong. The Motley Fool owns shares of GameStop and Applied Materials, and has created a bull call spread on Cisco Systems. Motley Fool newsletter services have recommended Cisco Systems and writing covered calls in GameStop. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that's written in micro-font but still macro in scale.