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Top Five Small Cap Stocks Showing Potential

Investing in small caps can be extremely volatile. On the one hand, the chance to get in ahead of institutional investors provides a solid opportunity to buy stocks at a discount before they can

Investing in small caps can be extremely volatile. On the one hand, the chance to get in ahead of institutional investors provides a solid opportunity to buy stocks at a discount before they can really take off. However, the potential for going completely bust on an investment is a much more real possibility than putting your money into blue chip stocks. However, for some, the appeal of getting into something before it breaks out is extremely enticing. And lucrative. So, without further ado, here are five small cap companies whose metrics would seem to indicate that they might be a good place to start looking.

Criteria for Stock Screen

Perfectly understanding which small cap companies are on the verge of major upswings is probably impossible. Goodness knows if I could do it, I’d be too busy counting my money to write this article. However, by digging into the market metrics of small cap companies, a savvy investor can sometimes find a number of indicators that could point towards long term growth. So, for each of these five companies, four things are true:

1. They have an average analyst recommendation of “buy” or better.

2. Their PEG is under one.

3. They had EPS growth of better than 25 percent this year, expect an EPS growth of 25 percent or better next year, and they have projected EPS growth exceeding 25 percent over the next five years.

4. Their market cap does not exceed $300 million and their share price is under $10 per share.

After running every stock through those rigorous standards, here are five small cap companies that are projecting strong earnings, solid growth, and currently come on the relative cheap.

1. Century Casinos, Inc. (CNTY)

Century Casinos is an international casino entertainment company that wholly or partially owns properties in the United States, Canada, Poland, and runs casinos on 12 cruise ships around the world. With a market cap of just over $50 million, Century is the smallest of these small cap stocks, but the company has seen their EPS more than double this year with strong predictions for the future as well.

2. Hardinge, Inc. (HDNG)

Hardinge is a designer, manufacturer and distributor of machine tools, specializing in precision computer numerically controlled metal-cutting machines. With facilities located in Switzerland, Taiwan, the United States, China, and the United Kingdom, it’s an international company based out of Elmira, NY. Hardinge has gone up and down most of the year, currently down 8 percent since January, but they do offer the added bonus of a 0.90 percent dividend to go with their PEG of 0.33 and projected EPS growth of over 80 percent next year.

3. SeaChange International (SEAC)

SeaChange specializes in delivery of multi-screen video (what, you couldn’t tell from the name?). Based out of Acton, MA, SeaChange sells specialized electronics and software that aid in video delivery across multiple platforms. SeaChange is down 10 percent on the year, but its EPS growth over that same period has been over 2000 percent with strong projections for continued growth into the future.

4. Stoneridge, Inc. (SRI)

Stoneridge is a designer and maker of electronic components, modules and systems for the commercial vehicle, automotive, agricultural and off-highway vehicle markets. Based in Warren, OH, Stoneridge specializes in highly engineered electric devices ranging from power and signal distribution systems to canister vent solenoids. Stoneridge has had a rough year, down over 45 percent since January after joining the entire market during its early August nosedive. However, with a PEG under 0.4 and EPS growth expected to top 70 percent next year, Stoneridge appears to have a real shot at bouncing back.

5. Xerium Technologies, Inc. (XRM)

Xerium is is a global manufacturer and supplier of consumable products used primarily in the production of paper clothing and roll covers. Headquartered in Raleigh, NC, Xerium helps paper products manufacturers maximize the function and efficiency of their equipment. Xerium has had a rough year, losing over half its share value, but a PEG under 0.40, EPS growth over 80 percent this year, and strong 2012 guidance all could mean that it’s ready to take off.

Private equity financing requires the appetite and a reasonable interest rate. And my sense is that banks today do not have the appetite.