In yesterday's letter, Making the Microcap Index Adds Cache, I wrote that "Several of the companies that have been selected to join the [Russell] microcap index have the potential to make significant gains over the second half of this year - but just making the index alone doesn't guarantee share price appreciation. The companies need to perform - and we only want to get in on the best ones."
Today I'm introducing you to three of the best. These are three tiny companies that have to potential for eye popping gains. Of course, they are risky investments as well simply because of their miniscule size - but it's much more likely that a sub-$100 million market cap company will triple, or more, in size than a company worth $5 billion. ...
Sleeper Stock #1: Northern Technologies International Corporation (NasdaqGM:NTIC - News)
Northern Technology International Corporation makes protective coatings and eco-friendly polymer resin compounds. It's a tiny company, the market cap is only $42 million, and it trades on very thin volume of only around 2,000 shares a day - so be aware that share price volatility is the norm. Despite its tiny size, the company has international exposure - in the last quarter 20 percent of sales came from outside of the U.S.
Northern Technology's stock price has been strong over the last year. After hitting a low of $5 last June it has risen nearly 100% to close at $9.85 yesterday. The stock is trading in a nice upward channel, and has recently pulled back to a level that suggests now is a great time to buy.
Analysts are forecasting strong earnings growth of 156 percent this year and 70 percent in 2011. And I'm not talking just pennies in earnings either like many micro-caps report - Northern Tech is expected to earn $0.50 per share this year. What's more, income growth isn't just about cutting costs. Revenue growth is projected to be 42 percent this year, and 36 percent in 2011.
The company has no long-term debt, but also doesn't have a ton of cash on hand - so cash flow is absolutely critical. With a forward PE of just 11.6 and a PEG ratio of .79, Northern Technologies is a sleeper stock worth your attention if you can handle the nightmarish liquidity.
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