Seeking Ideas at the 'Woodstock' of Small-Caps, Part I

 | Dec 07, 2012 | 9:33 AM EST  | Comments
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In our unending search to bring subscribers the best investment ideas, I spent a day this week at what I call the "Woodstock" of small-cap conferences. Small-cap investor extraordinaire Chris Lahiji sponsors what has quickly become the premier event to find exciting, emerging companies: the LD Micro Conference. As always, the conference occurred in luxurious accommodations in western Los Angeles, and featured more than 120 companies presenting to several hundred investors.

The conference is a cornucopia of potential, featuring the small companies that will be the creators of growth and new employment in tomorrow's economy. Naturally not all of them will work – small-cap investing is high risk -- but here are a few that tickled my fancy, and are worth further research on your part. Here is a partial list, with more to come in Monday's post.

Abtech Holdings (ABHD): I reported on Abtech recently after seeing the comapny at a conference, so the presentation at LDMicro provides a good update. After years of development, Abtech is about to transform into a rapidly growing, revenue and earnings producing company. The company owns an impressive proprietary technology, a highly engineered sponge-like material that can remove pollutants from water, such as hydrocarbons (oil), sediment, etc. The company is addressing the large market for municipal waste water treatment, in particular managing storm water runoff, which is not well treated now. The distribution deal it has made with Waste Management ensures strong marketing capability. The company did recently back off its guidance for 2012 because the timing of this deal impacted its revenue ramp, but the story still feels like a "when" rather than "if" scenario.

Acacia Research (ACTG): Acacia could be derogated as a "patent troll," since it is in the business of acquiring and licensing patented innovations. Having said that, the company's revenue has grown from $67 million in 2009 to over $200 million this year, and its strong profitability indicates that it is on to something. With a $700 million enterprise value, it is a real company with real prospects. Investors need to get comfortable with the durability of royalty flows, but with a sufficiently diverse portfolio and more deals in the pipeline, it seems like growth should be sustainable in the quarters ahead.

Perion Network (PERI): This company is tapping the media sharing trends pioneered by Instagram and the like. Perion offers email customization, photo-sharing and other tools to consumers. Revenue growth is robust, and has risen from $27 million in 2009 to $49 million this year, with strong profitability. The company has an $89 million market cap, PERI is trading at only 8x earnings, so is an intriguing value as well as growth play.

PhotoMedex (PHMD): PhotoMedex builds laser systems that treat dermatological conditions such as psoriasis. The company is focused on conditions rather than aesthetics, and is creating a recurring revenue model by selling the service. rather than the equipment, to dermatologists and hospitals. The company's revenue grew from $32 million in 2009 to $194 million this year, and operating cash flow is turning strongly positive. Cash is piling up, and management has eliminated all debt from the balance sheet. At a $235 million market cap, it is trading at only 10x forward EPS despite the robust growth.

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