With the Federal Reserve standing pat this week, the S&P 500 index has reached another all-time high.
Yet this bull market is proving to be even more fertile for investors in small-cap and micro-cap stocks. Both the iShares Russell Microcap Index and the Russell 2000 Small Cap Index are outperforming the S&P 500 by a solid margin over the past two years.
With no end in sight to the bull market, there’s no reason to stop focusing on these small companies at this juncture. If the economy can manage to build a head of steam in 2014 and 2015, then these small stocks should see even deeper investor interest.
Here are three stocks that all trade below $5 and sport market values below $500 million — and are poised for solid upside if this rally continues.
1. Lionbridge Technologies, Inc. (NASDAQ:LIOX) |
![]() Much of this new business activity has yet to bolster the income statement. Indeed, sales are likely to rise at less than 10% (on a year-over-year basis) in coming quarters, but the seeds appear to be in place for more robust growth as the global economy mends. I encourage you to read the management discussion to gain a deeper sense of Lionbridge’s growth prospects. |
2. Novavax, Inc. (NASDAQ:NVAX) |
![]() ![]() The RSV meetings are just a near-term catalyst for this stock. Long term, Novavax is pursuing a vaccine for the herpes virus, bird flu and even the seasonal flu virus. Those potential market opportunities explain why Novavax’s market value has already swelled to nearly $500 million. Yet analysts at Lazard see more than 200% upside to their $11 target price. They view the company’s drug development and approval as a “when” and not “if” situation. Management will be holding a detailed discussion of the drug pipeline next week, making this a good time to brush up on this under-the-radar biotech investment opportunity. |
3. Merge Healthcare Inc. (NASDAQ:MRGE) |
![]() A new management team was brought in at the time, and a few weeks later, on Aug. 26, Chairman Michael Ferro resigned. But Ferro has an ulterior motive. He’s not abandoning a sinking ship — he wants to avoid any conflicts of interest as he finds ways to boost shareholder value. “I do not believe that the current trading price of Merge common stock reflects the company’s inherent strengths, market position or long-term prospects,” Ferro noted at the time, adding that “I intend to explore a variety of ways to increase shareholder value, including, possibly, a going-private transaction.” Since then, shares have been steadily rising, thought they remain well below the $4.50 level seen earlier this summer. Despite the near-term revenue pressures, Merge is actually very well-positioned for the move to digital health care. The company’s software modules capture a range of images such as X-rays, and store them in interoperable formats that can be used at both major hospitals and local doctor’s offices. It’s not often you find a software provider trading at 1 times sales, and a return to growth or a company buyout would lead that multiple to expand higher. |
Risks to Consider: Small-cap and micro-cap stocks would be among the hardest hit in any market slump.
Action to Take–> These stocks are starting to trend higher but have ample upside if they can deliver on the business plans in front of them.
P.S. Health care stocks like MRGE and NVAX certainly look promising — but did you know there’s a tiny Israeli company that’s set to revolutionize a key surgery market next year? That’s one of the “shocking” predictions in our latest report, “The Hottest Investment Opportunities For 2014.” Our previous predictions have returned up to 310% gains in a year; to read our latest, click here.
– David Sterman
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