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Small Cap Focus: 5 Stocks Showing Potential

Investing in small-cap stocks can be a real crap shoot. While larger, blue-chips have a certain stability connected to their size, small-cap companies can experience much larger swings up and

Investing in small-cap stocks can be a real crap shoot. While larger, blue-chips have a certain stability connected to their size, small-cap companies can experience much larger swings up and down. A smart investment in the small cap market can yield massive returns, or it can suffer huge losses. However, for those willing to accept the inherent risks, there are some promising small-cap companies that might warrant a second look based on their operating margins and average analyst opinions.

Forestar Group (FOR)

Forestar is a real estate and natural resources company which owns 220,000 acres of real estate and 660,000 net acres of mineral interests. Forestar has real estate interests in nine states and 12 markets, and the land includes some 197,000 acres of timber resources. Forestar has a market cap of just over $585 million, and EPS growth is expected to be sharply negative for the next year. However, the company’s P/FCF of 10.70, P/B of 1.08, and an operating margin of over 58 percent all indicate that Forestar may have a bright future ahead.

Portfolio Recovery Associates (PRAA)

Portfolio Recovery Associates is engaged in the business of debt, specializing in the purchasing, collecting, and managing defaulted consumer receivables. In short, Portfolio Recovery Associates buys up people’s debt and then collects what they can. The company, meanwhile, shows signs that it might be undervalued at the moment. Its PEG of 0.83 and P/FCF of 7.78 would seem to indicate a healthy business plan, and the operating margin of over 20 percent could mean good things. While currently showing a market cap of just over $1.2 billion, Portfolio may be a company poised to grow.

AVEO Pharmaceuticals (AVEO)

AVEO is engaged in the business of cancer therapeutics, specializing in the discovery and development of targeted treatments to improve patients’ lives. AVEO has not been having a good time thus far in 2012. While the majority of the market has been on the rise, AVEO has lost nearly 24 percent. The company took another hit today when it reported a Q4 loss slightly larger than analyst expectations. However, AVEO appears to have enough cash to coast through the next year and a half and has Tivozanib, a cancer treatment developed with Astellas (4503.TYO), is in the pipeline with plans to file for marketing approval in the third quarter. The company has operating and profit margins over 25 percent, and insider buying has spiked in the last six months, giving reason to believe AVEO may turn it around.

Ebix (EBIX)

Ebix is a technology company specializing in software and e-commerce solutions for the insurance industry. While the company features valuations that are relatively good but not great, the strong margins make Ebix look more appealing. Ebix has a gross margin of almost 80 percent, an operating margin of over 40 percent, and a profit margin of almost 44 percent. All of these point towards a healthy business model that will keep money flowing in and give Ebix a reason to keep growing.

OYO Geospace Corporation (OYOG)

OYO Geospace makes equipment and instruments for obtaining and analyzing seismic data. The company also manufactures thermal imaging equipment and dry thermal film. OYO shows some bullish data in its valuation, with a 26 percent operating margin, a PEG of just 0.60, and a Forward P/E of under 15. Throw in strong numbers on projected EPS growth over the next five years and OYO may be resting on more stable ground than its customers.

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