Investing in small-cap plays (and smaller) is enticing for investors on account of their potential for high returns. Of course, gambling on small stocks means taking the risk that the investment will go belly up. While that random start-up could become the next Microsoft (MSFT) it is also much more likely to go under than, say, the actual Microsoft.
But while companies like Microsoft are safe, they’re not nearly as lucrative in the short term. For the investor looking to score a high annual return without taking on too much risk, the question is: does such a thing exist? That is, are there companies that sport the history and cash reserves of avoid failure, while still possessing the potential for high returns?
While we can’t ever predict such a thing with certainty, we can screen for the most stable of the growth stocks That is, even if the tech stock doesn’t ever truly blow up, the chances of it going under are far less severe.
To find small tech stocks with both a potential for growth we went looking for tech plays that satisfied the following requirements:
1) The company is worth less than $2 billion.
While some tech plays larger than this are capable of massive returns – see Facebook Inc. (FB) in 2013 – such cases are the exception rather than the rule. Small tech plays are much more likely to notch big percentage gains than their larger contemporaries.
2) Current Ratio over 1.
This means the company possesses the ability to pay their immediate liabilities. This means the company is not overleveraged.
3) Gross Margin over 50 percent.
This means the company is actually making a decent amount of money relative to their expenses, and that their business model is already profitable.
4) Return on Equity over 15 percent.
A solid return on equity means the company is generating profit in a nice percentage to shareholder investment.
5) Sales growth quarter over quarter of more than 25 percent.
The kicker. High sales growth means exactly what it sounds like it does: the company is selling more and more of their product. At the core of every growth stock is growing sales, and growth over 25 percent is quite impressive.
After applying this criteria, we found seven tech plays that are both growing while generating enough cash to (hopefully) keep them from sinking:
Ambarella Inc. (AMBA)
Bitauto Holdings Limited (BITA)
Care.com, Inc. (CRCM)
ICG Group Inc. (ICGE)
Mavenir Systems, Inc. (MVNR)
Premier, Inc. (PINC)
UBIC, Inc. (UBIC)