Sizing Up Some Small-Cap Stocks

 | Jul 30, 2013 | 12:00 PM EDT
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In early June a friend of mine told me about a small biotech stock that was developing products to target cancer. He thought it looked interesting.

The firm was Verastem (VSTM). I took a quick glance at the company and saw it had no revenues right now, but had some interesting drugs in Phase I trials. I also saw it had one of the most important things I look for with small-caps with not much public data available: insider buying. Insiders had been consistent buyers of the shares for months at the $9 to $10 level.

I put the company in my file to research further, but VSTM slipped through the cracks and I forgot to follow up and do additional due diligence. Of course, the stock is up more than 50% since then, even with a recent public offering announcement.

Fortunately for my friend, he had already acquired the shares at under $10. Trying to make amends to my own portfolio, I spent some time Monday looking at small- cap stocks that have had recent insider buying that could make similar moves. Here are two I like.

Relm Wireless (RWC) is a manufacturer of wireless communications products. They make two-way land mobile radios aimed at professional radio users primarily in government and public safety applications. The company has a small market capitalization of less than $50 million.

Demand for Relm's products was obviously hurt by the cutbacks at the state and local governmental level during the financial crisis and its aftermath. The stock has made a nice recovery and has more than doubled in 2013. An insider believes RWC has further upside, judging by the approximately $1 million in stock purchases he has made over the last month, or so.

On the cover of The Wall Street Journal today, there is an article entitled "Cities Begin Hiring Again". The article goes into detail on how municipalities are again adding to their police and firefighting forces. This obviously would be good for the demand in Relm's core product lines and the company has landed some significant contracts from public safety agencies and the Department of Agriculture over the last few months.

The company has net cash on its balance sheet and revenues are tracking to a double digit increase for this year. RWC goes for a little over 16x this year's expected earnings. Privet Fund also announced a 6% stake in the company in early May.

Casella Waste Systems (CWST) is a waste management company with landfills, recycling facilities and other operations in the northeast. The company has less than a $200 million market capitalization but has almost $500 million in debt. Insiders bought over $100,000 in shares in March and April. The company is currently posting small losses, but is operating cash flow positive.

What I find interesting is that this company recently brought in a new leadership team, and CWST was selling at triple its current price prior to the recession. Given how hard it is to open and permit these types of facilities in the northeast, it could make a very attractive acquisition target for a larger player in the industry.

This is especially true, given the stock sells for just 40% of annual revenues. That is less than one-third of what the bigger players like Waste Management (WM) or Republic Services (RSG) are valued at in this market.

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