Everyone wants to be the "king of mountain" on Wall Street, as the top stocks get all of the attention from analysts, bankers and journalists. After all, few analysts want to cover small- or micro-cap stocks, while investment bankers are usually too busy with big deals to waste time on such "little fish." This can create big opportunities in small stocks -- and here are three such names to check out.
Espey -- which manufactures and supplies specialty electronic equipment for military applications -- has been in business for nearly 90 years, but gets scant attention because has just a $63-million market cap.
However, the firm combines a 4% dividend yield with net cash on its balance sheet. The stock isn't a bargain right now at 20x earnings, but it's a quality little business that you should be watching closely.
Investors Title (ITIC)
This under-the-radar stock operates in the essentially oligopolistic industry of title insurance.
Now, anyone who's ever bought or sold a house knows that title insurance is one of those obscure line items that appears on every closing statement. But ITIC's 10% net profit margin and 10% unlevered return on equity show that this sleepy little product boasts an attractive business model.
If the housing market still in rebound mode, then names like ITIC will benefit. But even if the U.S. homeownership rate continues to plunge, that might not matter.
After all, the title-insurance business is all about the overall volume of real estate transactions, not about who's buying or why. Even if someone purchases a home as an investment property that they plan to rent out to someone else, the transaction itself is all that's important to title insurers.
Kona Grill (KONA)
Casual-dining chain Kona Grill has seen its shares tumble by nearly 50% recently even though the company focuses on trendy cocktails, sushi and other fresh fare.
Kona operates 41 restaurants in the United States (including Puerto Rico), but the chain's results have turned red. Those willing to buy the stock must feel comfortable that KONA can both survive and return to profitability.
The Bottom Line
The overall lesson here is that investors would be well-served spending some time looking at small companies like the three above. Such firms get scant attention from the public, leaving some "undiscovered gems" out there for you to find.
Of course smaller stocks can also be dangerous. So, it's critical to approach microcap stocks by doing lots of investigative work.