Time to Analyze Small-Caps Again

 | Jan 10, 2014 | 1:00 PM EST  | Comments
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Stock quotes in this article:

acls

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axas

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ctic

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bax

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teva

This column got away from its "Small-Cap Friday" feature over the past month as we headed through the holidays and into 2014. It is time to bring the topic back in focus, as I still believe there are some good values in this area, which receives scant analyst coverage.

Below are three attractive small-cap plays. All are priced between $2 and $3.50 a share, have attractive valuations and look like they have potential in 2014.

Axcelis Technologies (ACLS) --This company, which makes processing equipment used in the fabrication of semiconductor chips, came onto my radar the other day. Needham slapped a "Buy" rating and a $3.50 a share price target on the stock, which would represent 40% upside above its current price level. The analyst at Needham was impressed with its new line of Purion ion implanters and its efforts to streamline its operations.

The company has a healthy balance sheet with over 10% of its market capitalization in net cash. The company is a 2014 growth play. After losing money in 2013, Axcelis is projected to post a profit of 2 dimes a share in 2014 on a better-than-50% gain in revenue over the coming 12 months. The stock is still at less than half the level it was prior to the financial crisis despite a recent rally.

Abraxas Petroleum (AXAS) -- This company is still one of my favorite small Bakken exploration-and-production plays. The stock has gained more than 50% since summer, but it recently pulled back to $3.20. Part of the pullback was due to the retreat in West Texas Intermediate crude prices. There was also concern about some oil-train derailments and explosions in the region, which could trigger additional regulations around transporting oil from the Bakken.

I think Abraxas is still a good long-term growth play. With the company having broken even in 2012, earnings should come in at $0.20 a share this fiscal year. The consensus forecast for 2014 is for a 60% year-over-year profit gain. The company has a solid balance sheet, and the stock has seen some minor insider buying recently. At 10x forward earnings, it is currently too cheap.

Cell Therapeutics (CTIC) -- This company has consistently disappointed investors for a decade and a half. The only thing at which Cell Therapeutics has excelled over that period has been raising new funds. It recently signed a game-changing partnership, however, with Baxter (BAX) for developing its Pacritinib treatment for myelofibrosis and acute myeloid leukemia.

Baxter will pay up to $127 million in upfront and milestone payments, as well as take a small equity stake in Cell Therapeutics. This will fund the development and testing of this potential lucrative drug, and it takes the need to raise additional equity financing off the table. The company has also received some positive comments and results on other compounds in development, and it recently received a small milestone payment from Teva Pharmaceuticals (TEVA) as well.

The company has under a $300 million market capitalization, substantial net cash on its balance, an important new partner and some promising compounds in development. For $2.50 a share, it is worth a small bet that the company will finally live up to its long awaited potential.

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