Searching for the right small-cap investment prospect is an endeavor that typically requires different, and more, research and deliberation than applied to other equity vehicles. Smaller companies offer greater growth potential and the chance to get in on the ground floor, but the consequences of failure, missteps, freak accident, or any combination thereof make the risks more significant.
The relatively greater risk of the small-cap sector can be mitigated, however, by knowing which fundamental indicators to look for. Institutional ownership can be a valuable tool to have at one’s disposal in this regard. A high level of interest in a stock on the part of fund managers can be interpreted as a signal that a company has been subjected to and has passed a more rigorous vetting process than others.
Institutional ownership is not without its drawbacks. Indeed, while fund managers and individual investors may have overlapping interests in a given investment, there are points at which these interests can diverge as well, at which point the actions of a fund can have overdue influence on share-prices.
The following five Materials stocks trading on the NASDAQ were selected based on market-cap (small and up), positive year-to-date performance, and a high level of institutional ownership (above 90 percent).
Energy XXI (Bermuda) Limited (EXXI) –
Market Cap: $2.49 billion
Institutional Ownership: 97.90 percent
Year-to-Date Performance: +0.03 percent
Headquartered in Bermuda, Energy XXI is an oil and gas services company that acquires and operates oil and natural gas exploration and production properties at onshore sites in Louisiana and Texas, and offshore in the Gulf of Mexico. At the midway point of 2013, the company boasted of proven reserves stood at 178 million barrels of oil and equivalents, through over 460 wells. While the company’s performance might seem slight on a year-to-date basis, over the last six months, Energy XXI’s shares have added 40 percent.
Carrizo Oil & Gas Inc. (CRZO) –
Market Cap: $1.77 billion
Institutional Ownership:99.30 percent
Year-to-Date Performance: +111.23 percent
The Houston, Texas-based oil & gas independent is tapped in to some of the US’s best shale prospects, including the Eagle Ford and Barnett plays in Texas, Colorado’s Niobrara play, the Utica play in Ohio and Pennsylvania, and the Marcellus play in New York and West Virginia. By the end of 2012, the company was sitting on nearly 50 million barrels of crude and equivalents, along with another 428 billion cubic feet of natural gas.
Innophos Holdings Inc. (IPHS) –
Market Cap: $1.22 billion
Institutional Ownership: 97 percent
Year-to-Date Performance: +22.43 percent
The Cranbury, New Jersey-based specialty chemicals company produces mineral-based components for a variety of foods, nutritional supplements, cleaning products and pharmaceuticals, in the form of such things as flavor enhancers and electrolytes for bottled beverages and texture modifiers.
Rex Energy Corporation (REXX) –
Market Cap: $1.19 billion
Institutional Ownership: 94.90 percent
Year-to-Date Performance: 74.04 percent
The Pennsylvania-based oil and gas exploration firm is a pure Appalachian shale play, operating in the Utica, Upper Devonian, and Marcellus Shales in the US Northeast. At last year’s close, the company was operating over 2,100 wells, with estimated proven reserves at 618 billion cubic feet of equivalents.
Innospec Inc. (IOSP) –
Market Cap: $1.09 billion
Institutional Ownership: 94.30 percent
Year-to-Date Performance: +34.65
The Littleton, Colorado-based specialty chemicals manufacturer mostly produces a variety of fuel additives, but also ingredients for personal care and fragrance products.