The Atlas of Micro-Caps: Part 2

 | Dec 11, 2013 | 10:00 AM EST  | Comments
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Stock quotes in this article:

liwa

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phmd

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xwes

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adk

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newt

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pcom

I highlighted last Friday  some intriguing small-cap names from the "Woodstock" of small-cap conferences, the annual  LDMicro Conference, organized by the "Atlas" of small-caps, Chris Lahiji.

The conference is a cornucopia of enticing, attractive, and compelling small cap ideas. Three that tickled my fancy, which I covered Friday, were Lihua International (LIWA), PhotoMedex (PHMD), and World Energy Solutions (XWES). Today, I will hit three more that presented at the conference and are worthy of deeper research. Please 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!

Adcare Health Systems (ADK) is another one where rip-roaring growth slowed this year, but is set to resume in 2014. ADK runs skilled nursing and assisted living facilities across the south and in Ohio. ADK did $202 million of sales in 2012, up from $51 in 2010! Analysts are looking for more modest growth to $226 this year, then up to $257 mil a couple years out.

With a real estate element, this is a cash flow story, and the company should generate $11 million of earnings before interest, taxes, depreciation and amortization a couple years out. At a $60 million cap, but subtracting $17 million of cash, the stock is valued at 4x that out year cash flow. This will not be a home run name, but should see steady appreciation as it serves an aging population.  I also liked this one at last year's LDMicro, and the story seems to be getting better even though the stock did little this year.

Newtek Business Services (NEWT) is a recovering economy play, for those of you in the economic growth camp. Operating under the brand name "The Small Business Authority", NEWT is a one-stop shop for small business payment solutions. NEWT provides electronic payment processing, such as credit/debit card processing, and check approval services. The offering extends to ecommerce, where they offer payment processing, and online shopping cart tools.

The company even delves into financing by originating small business administration loans and offering accounts receivable factoring. Earnings grew from $5.6 mil in 2010 from $1.4 million in 2012. They are set to hit $7.2 this year and $12 in 2015, according to analyst estimates. With a $100 million market cap less $32 million of net cash, this stock is cheap at 7x 2014 earnings.

Points International (PCOM) has been a huge winner, but I still like it today. I first profiled PCOM after the 2011 LDMicro Conference, when the stock was $8. Two years later it is trading at $26, yet I think it has further to run. Points is based in Toronto, but traded in the U.S. It is a leading provider of software that enables corporations to easily offer points programs, including tracking and sales of points.

PCOM should do $207 million in revenue in 2013 and grow to $303 million in 2014, according to the seven analysts that cover it. The stock is not cheap at 37x the 2014 earnings per share, but two years ago I pointed out how expensive it was at 50x. The earnings growth made it look cheap in hindsight.

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