Market Is Doing
After that kind of year, Wall Street presumed the S&P 500 and other major indices would climb a more modest five percent in 2014. That hasn’t happened either. By the halfway point of the year, the S&P 500 had already climbed more than six percent. Now that companies are actually starting to report solid earnings and revenue growth, it’s quite possible the S&P 500 could report another year of double-digit gains.
Even though the current bull market is more than five years old and, by all historical accounts, ripe for a correction, the markets don’t show any signs of slowing down. After all, if the markets can climb consistently higher on weak economic data and earnings, imagine what they can do when the markets are legitimately performing well—and not as a result of cost-cutting measures.
Strong revenue and earnings and an improving economy bodes well for micro-cap stocks as we head into 2015. But of course, not all micro-cap stocks. The vast majority of micro-cap stocks trade in the low single-digits because they deserve to.
Still, there are a small number of micro-cap stocks out there with great upside potential. You just have to know what to look for. Wall Street might warn investors to stay away from micro-cap stocks, but if you engage in proper due diligence, there’s absolutely no reason to avoid micro-caps altogether.
Those who believe there is safety in large-cap stocks simply because they’re bigger need only look to Lehman Brothers, Nortel, Enron, or countless others for proof that they aren’t.
Still, micro-cap stocks do operate differently than their mid- and large-cap peers. Micro-cap stocks, because they are usually smaller, tend to have light volume and wide price spreads. That means it can be easy to buy these stocks, but difficult to sell them. These factors also create the perfect situation for price manipulation. But again, this doesn’t apply to all micro-caps. However, because of these and many other factors, it’s even more important to do an exhaustive background check on any micro-cap stock you’re looking to add to your portfolio in 2015.
What would an exhaustive background check entail? It should include a close look at technical indicators, such as the moving average convergence/divergence (MACD), relative strength index (RSI), money flow index, price data (open, low, high, close), moving averages, resistance and support levels, and even Fibonacci sequences.
On the fundamental side, it’s imperative to dig into a micro-cap company’s financial statements. Look at any and all data that could have a material impact on the price of the micro-cap stock, including quarterly results, cash flow, and debt levels. Not only will it help you learn the health of a company, but it could also tell you if the micro-cap stock is currently undervalued, overvalued, or fairly priced.
Proper due diligence will help you learn where tomorrow’s big winners are today. That goes for micro-cap stocks, small-caps, and even mid- to large-caps. To find micro-cap stocks with great long-term growth potential, look for companies with growing earnings and revenues, solid cash positions, and manageable debt levels.
Also Read: Top 5 Micro-Cap Stocks to Watch in 2014
What qualifies as a micro-cap stock? While some like to pigeonhole a micro-cap stock as a company with a market cap of less than $300 million, the fact of the matter is that most investors look at the share price before they look at a company’s market cap. So what price range should you be looking at? Simply put, anything trading under $5.00.
The following are five micro-cap stocks that are great examples of the kind of companies you should be watching in 2015.
1. Riverview Bancorp, Inc. (NASDAQ/RVSB) – During the Great Recession, the Federal Reserve and the U.S. government bailed out America’s big banks. In spite of near-record-low interest rates, big banks have been some of the biggest winners during the bull market. With interest rates expected to start rising in 2015, banks will be able to charge more for what they loan. And Riverview Bancorp, Inc. could be a big winner.
Riverview Bancorp is the holding company for Riverview Community Bank, which operates 17 branches located primarily in Southwest Washington State and Oregon. Commercial construction and commercial real estate loans account for nearly 90% of its lending portfolio.
During the first quarter of fiscal 2015 (ended June 30, 2014), Riverview reported that it earned $740,000, or $0.03 per diluted share—it’s eighth consecutive profitable quarter. The company also continued to make meaningful progress in reducing nonperforming and classified assets while growing its loan portfolio. The steady economic recovery in Southwest Washington and Portland, Oregon has contributed to strong improvements in credit quality. (Source: “Riverview Bancorp Earns $740,000 in First Fiscal Quarter of 2015; Highlighted by Improved Credit Quality Metrics and Growth in the Loan Portfolio,” Yahoo! Finance web site, July 22, 2014; 1.)
2. Zix Corporation (NASDAQ/ZIXI) – Zix Corporation stops unsavory individuals from reading your e-mails. The company provides industry-leading e-mail encryption, data loss prevention, and transmission services. Its technology enables users to transmit encrypted e-mails and documents to any address in the world.
Zix is trusted by the nation’s most influential institutions in the healthcare, finance, and government sectors. The company has an e-mail encryption community with tens of millions of members, growing by 100,000 members per week. Customers include the Securities and Exchange Commission (SEC) and one in every five U.S. hospitals.
The company has a market cap of $225 million, $236 million in cash, and zero long-term debt. The company announced that second-quarter earnings exceeded expectations. Zix also recently unveiled the launch of “Google Apps Message Encryption” (GAME), expanded its hosted service for small- to medium-sized businesses, and launched “ZixDLP Insight.” (Source: “ZixCorp Announces 2014 Second Quarter Results,” Zix Corporation web site, July 22, 2014; 2.)
3. Ladenburg Thalmann Financial Services Inc. (NYSE/LTS) – Ladenburg Thalmann Financial Services Inc. provides investment banking, equity research, institutional sales and trading, independent brokerage and advisory services, and asset management services through its principal subsidiaries: Ladenburg Thalmann & Co. Inc.; Investacorp, Inc.; and Triad Advisors, Inc.
In early August, Ladenburg reported record second-quarter revenue of $220.8 million, a 14% increase from the $193.9 million in the second quarter of 2013. Net income attributable to the company was $2.9 million versus a loss of $5.5 million in the second quarter of 2013. (Source: “Ladenburg Thalmann Reports Second Quarter 2014 Financial Results,” Ladenburg Thalmann Financial Services Inc. web site, August 11, 2014; 3.)
During the second quarter, the company repurchased 871,481 shares of its common stock at a cost of approximately $2.5 million. During the first half of the year, Ladenburg repurchased 1,164,090 shares of its common stock at a cost of approximately $3.4 million.
The company also announced in August that it signed a definitive agreement to acquire KMS Financial Services, Inc., a leading Seattle-based independent broker-dealer and investment advisor with a strong presence in the Pacific Northwest. (Source: Ladenburg.com, press release, “Ladenburg Thalmann to Acquire KMS Financial Services,” Ladenburg Thalmann Financial Services Inc. web site, August 11, 2014; http://ir.stockpr.com/ladenburg/press-releases/detail/2324/ladenburg-thalmann-to-acquire-kms-financial-services.) KMS has approximately 325 independent financial advisors and more than $14.0 billion in client assets and revenues of approximately $84.0 million for the 12 months ended June 30, 2014.
With the KMS acquisition and Ladenburg’s pending acquisition of assets of Sunset Financial Services, Inc., the company’s network of independent brokerage and advisory firms will total approximately 3,500 financial advisors with $110 billion in total client assets. Ladenburg will have annual revenues of approximately $1.0 billion.
4. Avino Silver & Gold Mines Ltd. (NYSE/ASM) – The S&P 500 has experienced strong growth in 2013 and 2014. The same cannot be said for gold and silver. Where the S&P 500 is up more than 40% since the beginning of 2013, gold has lost a quarter of its value. So why consider a silver and gold company for 2015? The best time to consider precious metals is when the prices are depressed, not when prices are soaring.
Established in 1968, Avino Silver & Gold Mines Ltd. was one of the first foreign-owned junior mining companies to enter Mexico following the revolution that took place between 1910 and 1920. Avino is one of the industry’s purest silver producers and recently resumed production at its primary property in the Durango region of North Central Mexico.
The company has a market cap of $66.3 million, $12.5 million in cash, and $2.6 million in long-term debt.
Of the company’s four properties, only the Avino property is revenue-generating. The Avino property has total measured and indicated silver reserves of 13.64 million ounces and 90,758 ounces of gold. Total inferred deposits consist of 21.88 million ounces of silver and 164,937 ounces of gold. (Source: “Avino Property,” Avino Silver & Gold Mines Ltd. web site; 4, last accessed September 9, 2014.)
In its most recent second quarter, the company generated revenues of $5,104,921, a three-percent increase compared to the second quarter of 2013. Although metal prices decreased significantly in the time between, Avino recorded a higher number of silver equivalent ounces sold as a result of improved grades and recoveries. (Source: “Condensed Consolidated Interim Financial Statements,” Avino Silver & Gold Mines Ltd. web site, August 20, 2014; 5.)
The company reported income before taxes of $440,797. But because of deferred taxes and losses due to foreign exchange, the company reported a loss of $87,097, breaking even on a per-share basis. These impairments magnified their losses. Most importantly, the losses did not result from issues related to mining operations.
5. Chimera Investment Corporation (NYSE/CIM) – With the U.S. housing market getting stronger and showing signs of sustained growth, now might be a good time to reconsider the mortgage investment sector.
Chimera Investment Corporation invests in residential mortgage-backed securities (RMBs), residential mortgage loans, real estate–related securities, and various other asset classes.
The company has a market cap of $3.04 billion and provides a dividend of 11.02%.
For the second quarter (ended June 30, 2014), the company reported net income of $105 million, or $0.10 per average share, compared to $100 million, or $0.10 per average share, for the previous quarter (ended March 31, 2014). (Source: “Chimera Investment Corporation Reports EPS for the 2nd Quarter 2014 of $0.10 Per Share and Book Value of $3.35 Per Share,” Chimera Investment Corporation web site, August 11, 2014; 6.)
In late August, the company acquired the rights to approximately $4.8 billion of seasoned residential mortgage loans through the purchase of certain subordinate notes and trust certificates. The transaction gives Chimera access to a large amount of seasoned residential mortgage loans, which may be securitized into new investments. (Source: “Chimera Acquires Seasoned Residential Mortgage Assets,” Chimera Investment Corporation web site, September 3, 2014; 7.)
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