Hot Ideas in Microcap Land

 | Dec 09, 2011 | 11:30 AM EST
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As we welcome back market volatility (did anyone believe that Europe's ills were completely cured last week?) the hunt for non-correlated assets resumes.

We all have our hunting grounds, but I find the world of microcap stocks particularly fertile. Be warned, microcaps are highly risky, since they are often simply publicly traded venture capital. But they are very often uncorrelated.

With thin liquidity they usually only move in reaction to stock-specific factors, such as news flow or large shareholders moving in or out. My best trading year ever was from the summer of 2001 to the summer of 2002, when the market got destroyed. I was in several microcaps that worked out far better than I ever could have hoped, and they completely ignored what the market was doing.

In that hunt for the elusive next great thing, I pointed my car down the road and arrived at one of the best microcap conferences in our industry, the LDMicro Conference. Microcap impresario Chris Lahiji never fails to put on an amazing conference and this year lived up to the high expectations. He had more than 100 highly-promising names at a conference that stretched over two days this week. The names spanned industries from biotech to consumer to mining, but all had in common the potential to grow substantially in the years ahead.

Most will not. That is the nature of microcap investing. But a few stood out as worthy of further research.

Cryoport (CYRX) โ€“ I first highlighted this one a couple years ago, and I am still bullish on the story although it is taking longer to play out than I, or management, had hoped.  The company makes dry-vapor shipping containers that replace dry ice for shipping pharmaceutical samples and other items that need to remain frozen for long periods in transit. The key here is that they inject liquid nitrogen into a sort of Styrofoam, and the container can hold its temperature at a steady -150 for ten or more days. The efficacy and cost are far better than dry ice, and FedEx (FDX) is now marketing the containers, among other shippers.  Revenue has been slower to ramp than hoped, because pharma companies are very cautious in changing their protocols, but as Cryoport gets tested out, usage of the fleet should rise substantially in the years ahead.

Coastal Contacts (COA.T) โ€“ This is another I first highlighted after seeing them at LDMicro last year and the stock has been a winner, doubling from $1.50 to $3.00 over that period. The company sells contacts and eyewear online and is quickly establishing a franchise as the leading online outlet for these items. Contacts are the bread and butter, but fashion eyewear is the high-margin upside. The company is posting great results, with sales in the most recent quarter up 26% on orders growing 46%. Importantly, there is visibility into this being an annuity business, with existing customers generating 64% of orders. The company is still plowing cash flow back into expanding the business, so investors will have to be tolerant of little in the way of earnings, like Amazon for so many years.

Points International (PCOM) โ€“ This $125 million-market-cap company based in Toronto, but traded in the US, is a leading provider of platform technology for loyalty/reward programs. The company's software enables corporations to easily offer points programs, including tracking and sales of points. PCOM is doing around $100 million in revenue, although most is passes through, but the gross profit of $8 million enables $2 million to fall to the bottom line. The stock is certainly expensive at 50x, but the company is on a 25%-plus growth-rate path, so the premium will look like a discount in the next few years, presumably.

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volatility is quite low here, and we could see some downsides here in the short term. ...



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