They could be called the antithesis to Benjamin Graham's value investor, and you can always expect to find them in the same place.
The usual patrons in the small-cap world are typically stock speculators who've developed a refined palette for risk, and they're all too familiar with the common plight of the downtrodden company: "If only we had a little extra cash, we could really turn things around."
In such a market, there's a fine line between owning stock in a public company -- backed by steady earnings and a reliable dividend -- and owning an IOU backed by a catchy pitch and turnaround story.
But there are some companies that actually could turn things around with a cash infusion. For example, here are five candidates that could best put to use the mounting jackpot of the Powerball lottery, which recently surpassed $1.4 billion.
Barring the fact that the lotteries don't generally offer lump-sum prizes (shrewdly opting instead to make decades-long payout increments that substantially diminish the prizes's present value), Weight Watchers (WTW) would easily be right at the top of the list.
Shares of the debt-laden, weight-loss giant were buoyed 164% merely off the news that billionaire Oprah Winfrey was taking a 10% stake in October, and then another 28% off the release of her video advertisement. (These hope-ignited gyrations are clearly the markings of small-cap territory.)
But the genuine problems within Weight Watchers business lie within its capital structure. Its debt obligations are substantially widening, while its cash flows are thinning out: not the recipe for a healthy diet.
Worries of insolvency have caused shares to tank roughly 82% since a May 2011 high, which partly explains the excitement around getting a billionaire onboard: a little cash would go a long way.
Assuming a lump-sum (and why not throw in tax-free) payout of $1.4 billion, the New York-based diet program would be able to pay off 70% of its long-term debt, bringing leverage -- a measure of total debt over earnings -- to a manageable 6x from dangerously heavy 20x, based on Weight Watcher's 2014 earnings.
The first thing this would trigger -- aside from a surge in share prices (likely far sharper than the 164% generated by Winfrey's arrival) -- would be credit ratings upgrades. Suddenly Weight Watchers could borrow at more reasonable terms to invest more on marketing and rolling out new services.
And it wouldn't be long thereafter that Weight Watchers would be well on its way out of small-cap territory. (Weight Watchers' market cap was $928 million as of Monday.)
Next on the list would easily be Men's Wearhouse (MW). Online shopping and delivery services such as Amazon's (AMZN) has long begged the question: Is America over-retailed? And high levels of debt financing behind retail operations has sent no shortage of outlets into bankruptcy court.
Wearhouse shares are down more than 70% just since November, as weak third-quarter numbers hiked the company's leverage to unmanageable levels.
But a $1.4 billion payout would allow the Houston-based men's clothing retailer to pay off nearly 85% of its long-term debt, giving it ample time to survive an earnings drought. After all, the $27 million loss the company booked in its quarterly earnings roughly equates with the $26 million in interest payments it had to pay on its outstanding debt.
Number three would have to be Rent-a-Center (RCII), another small-cap mired in debt. Shares are down 62% over the past 12 months for the Plano, Texas-based rent-to-own retailer, and each major price drop is typically accompanied by concerns over leverage.
Rent-a-Center certainly has a proven track record of churning out profits. In its 2012 heyday it booked a net income of $182 million, a stark contrast from its $4 million loss booked in its third quarter last year, which would have been averted without the $12.5 interest payments made on its more than $900 million in senior debt.
And in today's low-price environment for oil, no list of small-caps in need would be complete without some petroleum names. Numbers four and five are testaments to the sustained cash burns that otherwise healthy energy names are facing in a price environment that is essentially forcing managers to turn off the pumps.
Oasis Petroleum (OAS) and EP Energy (EPE) have tanked over the last 12 months by 55% and 50%, respectively. Each have historically high earnings in their summer 2014 highs, and would be given a lot of breathing room with a winning Powerball ticket, lump-sum payment conditions applied.
Oasis would be able to pay off 59% of its long-term debt, and EP Energy would be able to pay off 28%, giving them a more reasonable timeframe to wait for a price comeback.