A bottom in on the Baltic?
The Motley Fool CAPS screener looked for small-caps with low price/ book, low P/E, five or more Wall Street Outperforms, gross margin over 25%, and three year EPS growth rate of 10%-plus. Only one name popped up of 1,284 small caps, Greek shipper Navios Maritime Holdings Inc. (NYSE:NM). Like most shipping stocks it offers a decent yield at 4.1%.
Dry bulk shippers have seen significant declines as demand for iron ore, grain, fertilizer, and building materials ebbs and flows. Shippers are dependent on a thriving global economy and especially, a prosperous Chinese economy.
A common misconception is that the Baltic Dry Index moves rates when it is the other way around; charter rates make up the dry index and are a leading economic indicator. The BDI is also partly impacted by the price of oil for fueling drybulkers.
Its average charter out rate for its core fleet was $18,907 daily for 2012, and is expected to grow to $30,343 a day for 2014. Its vessel operating expenses are 23% less than the industry average.
Calling a bottom in the BDI isn’t easy. It is running at lows unseen since 2002, yet Navios Maritime Holdings Inc. (NYSE:NM) is trading near its 52-week high of $5.99. Shipping stocks are volatile and speculative in nature, but this one has a trailing P/E of 4.2 with 10% EPS growth, a price/book of 0.51, and gross margin of 33.9%.
However, this name has a huge debt load with a debt/equity ratio of 105%. Credit is a very real problem for many Greek shippers with their own country’s banks turning their back on them. However, Navios Maritime Holdings Inc. (NYSE:NM) has a strategic partnership in place with HSH Nordbank AG to lend it money to buy four used dry bulk ships at yard sale prices for a combined $66 million.
Whether you see the glass of ouzo half full or half empty, this could be a good thing, investing in the enterprise when others are fearful. The company has created a strategic partnership with a major Japanese shipowner, calling the joint venture Navios Asia LLC. Navios Asia will purchase six ships for a total of $114 million. This will grow its existing fleet of 58 ships.
Like airlines, ships have maintenance costs and the newer the better. Navios Maritime Holdings Inc. (NYSE:NM) has justified this shipping shopping spree with the relative age of these ships at 6.1 to 7.8 years old to better compete against rivals like DryShips and Eagle Bulk Shipping.
Analysts expect a 16% growth rate for the next five years and Navios Maritime Holdings Inc. (NYSE:NM) has managed to keep paying out its dividend throughout the worst of the perfect storm of drying credit and tanking shipping rates, which saw many competitors go under.
A small-cap play on guns
An interesting retailer, in time for back to school season, is Big 5 Sporting Goods Corporation (NASDAQ:BGFV), with 414 stores in 12 western states. A small cap with a yield of 1.60%, it has a trailing P/E of 23.97 (not unusual for retail) and is trading pennies shy of its 52-week high. It has a PEG of 1.21, so one might want to wait for a pullback for a fairer value.
The company reports Q2 earnings on July 30. Q1 results were very strong (they’ve obviously been working out!) with same store sales up 10.5%, expanding margins with the gross profit margin at 32.7%, and both EPS and revenue exceeding guidance.
CEO Steven Miller said, “Net income for the first quarter of fiscal 2013 was $7.5 million, or $0.34 per diluted share, compared to net income of $156,000, or $0.01 per diluted share, for the first quarter of fiscal 2012.We believe these results for the quarter reflect the ongoing enhancements to our merchandise and marketing programs and the continued benefit from the national increase in demand for firearms and ammunition products.”
Yes, it is a play on guns just as Cabela’s is. Big 5 Sporting Goods Corporation (NASDAQ:BGFV), however, has smaller stores than Cabela’s, a traditional square footage of 11,000 square feet and a full-line product offering. The company plans to open approximately 15 new stores this year for a reasonable expansion plan.
The 58-year old company went public in 2002. Headquarterd in El Segundo, CA, almost half of its stores are in California. The stock is up 227% in the last year. That’s how small caps can roll, but it is not surprising after its growth in diluted EPS. With such high expectations, waiting until after earnings are digested would be advised.
Impenetrable moat
Screening for a company with no debt and a P/E under 20 led to a CAPS five star ranked name with a 60.6 % gross profit margin, 3.1% yield, and a 14.92 trailing P/E…The Female Health Company (NASDAQ:FHCO), world leader in female condoms with a monopoly and impenetrable moat.
Its sole product is its FC2 female condom, distributed to public health agencies around the world. This product is the only FDA-approved female condom and is cleared by the World Health Organization for purchase.
It’s headquartered in Chicago and has 144 employees with revenue per employee of $263,578. This tiny company has been shareholder friendly and is buying back stock. The company was also named one of Motley Fool’s 25 Best Companies in America for 2013.
Barriers to entry are high as it took The Female Health Company (NASDAQ:FHCO) two decades to obtain regulatory approvals and almost 18 years of losses before the company started making a profit. Public health departments can save $20 for every dollar spent on the FC2 condom, a joint Washington DC Department of Health/Johns Hopkins University study concluded.
One caveat: the company’s website cautions, “Due to the receipt and timing of large orders, the Company experiences some quarter to quarter fluctuation in unit sales.“
Go big on small caps?
Small caps are riskier and due diligence is essential. But with great risk can come great reward. These three are proven small caps with yield and competitive advantages. Navios Maritime Holdings Inc. (NYSE:NM) is the riskiest, so I like both The Female Health Company (NASDAQ:FHCO) and Big 5 Sporting Goods Corporation (NASDAQ:BGFV) better.
The article Small Caps That Promise Big Returns originally appeared on Fool.com and is written by AnnaLisa Kraft.
AnnaLisa Kraft has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. AnnaLisa is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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