3 Small-Caps for 2012

 | Dec 29, 2011 | 1:00 PM EST
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At moment, fundamentals mean nothing to the market. Whether or not the market advances or declines is entirely dependent on what happens in the euro zone. But some small-cap names look poised for a rebound in 2012, even with the Europe uncertainty.

A Contrarian Play

Contrarian bets can pay off handsomely since they go from being universally hated to universally loved in a short period of time. Those willing to buy shares when they are most hated will profit the most. A great example is building materials supplier Builders FirstSource (BLDR), a $185 million supplier of residential building suppliers to homebuilders. Builders does not compete with Home Depot (HD) or Lowe's (LOW).

When the housing market was in full swing, Builders shares traded for more than $20. Today they trade for $1.95. They won't get back to $20 anytime soon, but if 2012 is finally the year when housing shows even modest growth, Builders shares will react favorably. In past month shares are up nearly 40% as the news from the housing sector has been somewhat encouraging. Still, Builders could be a $3-$4 stock this time next year.

Names to Watch

Calavo Growers (CVGW) is one of the nation's largest suppliers of avocados. The company is also expanding its business by offering ready guacamole, fresh salsas and other fresh-produce ready-to-eat items. Avocado demand continues to grow regardless of the economic scenario. The health benefits of eating avocados continue to gain national publicity and the Hispanic population in the US is expected to grow significantly over the years.

As a result, Calavo is likely to continue its winning ways in 2012. Shares are up 10% in 2011 vs. nothing for the S&P 500. Over the past two years, Calavo is up 60%, also outperforming the overall market. Calavo has also outperformed peers Dole Foods (DOLE), Fresh Del Monte Produce (FDP) and Chiquita Brands (CQB).

Sterling Construction (STRL) is a wonderful little business that gets scant attention in investment circles. That's likely the reason why this exclusive provider of infrastructure construction work trades for $11, with nearly $4 per share in net cash on the balance sheet. The business trades for 11x earnings and trades for 70% of book value. Sterling operates primarily in Texas, one of the strongest states for infrastructure construction. The company continues to win projects and shares haven't budged much over the past year despite growing sales and profit. That situation could change in 2012.

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