Three Small-Caps for a 'Risk-On' Market

 | Jan 28, 2013 | 11:00 AM EST
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The market is set to have its best January since at least 1994, after the fiscal cliff was averted and as retail money returns for the first time in over four years. We will have many hiccups and will have to navigate many challenges.

To begin this trading week, let's embrace the "risk on" sentiment on equities. Here are three cheap small-cap stocks that should do fine in a middling market but could shine in an environment of economic growth where mergers-and-acquisitions activity accelerates. All are selling for less than $10 a share, and two are just under the $5 level, below which some institutions are prohibited from purchasing shares.

Silicon Image (SIMG) provides wireless and wired connectivity solutions that enable the distribution and presentation of high-definition content for mobile, consumer electronics and personal computer markets.

Here are four reasons Silicon Image provides value at just under $5 a share:

  • The company has a fortress balance sheet with some $145 million in net cash on the books (just under 40% of its market capitalization).
  • Revenue is on track to rise almost 15% in fiscal 2012, and analysts see similar growth in fiscal 2013. The stock sports a five-year projected price/earnings-to-growth ratio of under 1 (at 0.90).
  • The mean price target of the six analysts who follows the stock is north of $7.50 a share, and insiders have been slight net buyers of the stock over the preceding six months.
  • Subtracting cash, the forward price-to-earnings ratio is right around 10. The stock's five-year average forward P/E is over 29.

Power-One (PWER) manufactures power-supply products for the renewable energy, servers, storage and networking, telecommunications, industrial and network power systems industries worldwide.

Here are four reasons Power-One is cheap at just over $4 a share:

  • The company's balance sheet is beyond pristine. It has about 60% of its market capitalization in net cash, or nearly $300 million.
  • The stock is selling at the bottom of its five-year valuation range on the basis of price to earnings, price to sales, price to cash flow and price to book value.
  • Despite the downturn in the alternative energy space, the company is still making money. It is tracking to just under $0.45 a share in the black in fiscal 2012, and analysts currently estimate earnings of near $0.35 a share in fiscal 2013.
  • Power-One has good technical support at these levels and has traded at much higher prices in the past.


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Quality Distribution (QLTY) is a logistical and transport company that operates in three segments: intermodal, energy and chemical logistics.

Here are four reasons Quality Distribution is a good value play at under $8:

  • Even though the stock has run up more than 20% since I bought it around $6 a share around a month ago, the stock still trades at under 9x forward earnings.
  • All three lines of its business are benefiting from the rapid expansion of domestic energy production. This is a long-term secular trend that should provide a tailwind for the company for the foreseeable future.
  • Insiders have been frequent buyers of the shares over the last year, and the stock traded at north of $14 a share less than a year ago.
  • Management has brought its debt-to-EBITDA leverage down from 6x in 2008 to the current 4x for this ratio, on its way to its goal of 2x to 2.5x leverage. Management recently approved a $15 million stock-repurchase program. It also has $77 million in net tax-loss carry-forwards.

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