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Universal American Corporation (UAM), Francesca’s Holdings Corp (FRAN): Three Winning Small Caps Set for Further Growth

So far this year, the S&P 500 is up around 17.8%, however, the Russell 2000, the small-cap market index composed of the bottom 2,000 stocks in the Russell 3000 index, is up 22%.

Universal American Corporation (NYSE:UAM)

Small caps have beaten the wider market due to their lack of international exposure and domestic growth. For example, international companies have been hurt by a rising U.S. dollar and mixed growth around the world. Meanwhile, companies which are based in the U.S. have been able to benefit from surging economic growth and rising consumer spending, as lower mortgage rates have led to refinancing and higher levels of consumer spending.

Three small caps set for further growth

First up is Universal American Corporation (NYSE:UAM), a good play on healthcare insurance throughout the U.S. Although small, Universal American Corporation (NYSE:UAM) still packs a punch. Valued at around $900 million, the company’s specialty is medical insurance and it offers services such as Medicare covered benefit, network-based private fee for service plans, and additional supplement benefits such as defined prescription drug plans.

Universal American Corporation (NYSE:UAM) sells its products through a network of independent general insurance agencies, and as the population grows older, Universal American Corporation (NYSE:UAM) should continue to benefit. Indeed, the Medicare market has been one of the fastest growing markets in the U.S. during the past few years, and the market is set to nearly double over the next eight years, rising from a total value of $600 billion in 2013 to $1,050 billion by 2021.

Universal American Corporation (NYSE:UAM) has two main revenue streams, insurance products and investment income. Indeed, during the first quarter, the company reported $521 million in revenue from insurance premiums and $40 million revenue from investment income. Additionally, the company easily beat analyst expectations with EPS of $0.20 for Q1, when $0.17 was expected.

Furthermore, on valuation grounds, Universal American Corporation (NYSE:UAM) looks cheap. The company trades at a P/B value of 0.86 and a price-to-sales ratio of 0.40, slightly below the ratio of its ten largest peers, which trade at a ratio of 0.43. However, the company does have a very low level of debt and EPS is expected to grow around 20% this year, as the company benefits from the rising value of its investments and increasing revenue from its insurance arm.

Profit from self-defense

Despite the almost consistent negative press surrounding the company, investors could do worse than put cash to work at Smith & Wesson Holding Corp (NASDAQ:SWHC). The company is on a roll and demand for firearms is far outstripping supply. The company’s EPS is expected to expand 10% this year, then 30% over the next five years, an impressive rate of growth.

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