Ideas From the 'Atlas' of Small-Caps

 | Dec 06, 2013 | 12:00 PM EST  | Comments
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phmd

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xwes

The beginning of December is "the most wonderful time of the year", not because the holiday season has begun, although I certainly enjoy that. For a stock market guy like me, especially one who loves finding great undiscovered small-cap names, early December means only one thing: the annual "Woodstock" of small-cap conferences, the LDMicro Conference. The conference takes place in my hometown of Los Angeles, and features over 200 companies presenting to hundreds of investors.

Every year, the "Atlas" of small-caps, Chris Lahiji, produces a cornucopia of enticing, attractive, and compelling small-cap ideas. This year I have dubbed Chris "Atlas" because he occasionally carries the world of small-cap investing on his shoulders. Chris has been committed to small-caps in the great years like 2013, and in the tough years such as 2008-2009. That commitment and a great track record have made this a "must do" conference for small-cap and microcap-investors.

Every year  I report the best ideas I find at the conference, and this year is no exception. As an added bonus, our  own Jim Collins is at the conference, and should be reporting in on his best ideas as well.

Here are some conference ideas that tickled my fancy. Keep in mind that like all of our "Long Shot" ideas, these small-cap names carry a substantial amount of risk. Please be extra diligent in doing your homework before establishing a position!

Lihua International (LIWA) – This is one I profiled this summer, and I am still a huge fan. Lihua makes copper wire for residential and commercial construction, electronics and utilities in China. This is a "green" story, because they use recycled copper. LIWA is growing rapidly, given the breakneck pace of economic expansion in China, but did post a modest decline in sales in the third quarter due to lost production days associated with a factory upgrade/ There was also a bit tighter spread between raw material cost and finished product.

I expect growth in 2014 to be strong as they ramp up a new high-tech, copper-clad aluminum product. The stock is beyond ridiculously cheap, with cash per share of over $6 and the stock price at $5.28. I still think this is a screaming buy for that reason alone!

PhotoMedex (PHMD) has been on fire the last few years. I first got plugged into this one at last year's LD Micro and profiled it soon after. PhotoMedex builds laser systems that treat dermatological conditions such as psoriasis, with a focus on conditions rather than aesthetics.

Unlike most medical device companies, they are pursuing a more sustainable, recurring revenue model by selling the service -- rather than the equipment -- to dermatologists and hospitals. Revenue of $221 million in 2012 (up 67% y/y) will be flat this year due to a pause in wholesale sales to their Japanese distributor (although retail sales in Japan were stable). The rest of their end markets continue to grow, so a resumption of sales in Japan should lead to resumed growth in 2014. Analysts are looking for 10% growth next year. At a 10x multiple, the stock is reasonably priced for attractive growth going forward.

World Energy Solutions (XWES) is a neat little energy company. They offer energy procurement services, efficiency programs (financing and installing efficiency products), and run an online energy exchange in which commercial entities can sell and buy electricity, natural gas, and other resources. After years of losses while the business developed, they turned profitable in 2012 with revenue of $32 million, gross margin of 68%, and net income of $5.3 million. Consensus 2014 revenue is $41 million.

XWES is still relatively undiscovered -- it is covered by two outstanding analysts (Colin Rusch at Northland and Phil Shen at Roth) but I think more people are going to catch on to this story soon.  I liked this one out of the 2012 LDMicro, and I still think the story is getting better as the company develops.

On Monday I will offer a few more exciting names that I caught up with at the conference. Meanwhile, get out there and shop this weekend and help our economy!

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