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All Contents © 2017The Kiplinger Washington Editors
By Louis Navellier
| July 2017
Accelerating growth is usually the sign that small-cap stocks will take the lead in the markets. While we’re seeing some growth in the economy — recent numbers show the economy grew 2.6% in the last quarter — the growth I’m talking about here is in specific sectors.
Semiconductors, healthcare equipment and financials to be specific.
The secular growth in these sectors provides a launching pad for small caps. The seven small caps with big-league potential below are all capable of scoring big gains on their own, and could well be acquisition targets for bigger industry players.
Either way, they are timely and show great potential.
Prices and data are from the original InvestorPlace story published on July 28, 2017. Click on ticker-symbol links in each slide for current prices and more.
This slide show is from InvestorPlace, not the Kiplinger editorial staff.
InTest Corporation (INTT) does exactly what its name implies, it designs and manufactures test equipment for the semiconductor industry.
As you have seen, Big Tech names have been driving the market for the past quarter or two, but now that their prices have priced in the growth in this sector, now the downstream players are benefiting.
This is a broad trend as demand for next-generation chips is growing rapidly now that everything we buy at this point has a chip in it. There has even been a recent news story about a company that is putting chips in its employees, so they open doors and log in to their computers with the aid of the chip.
It’s companies like INTT that are on the front line of making sure these chips are ready for prime time. Up 83% this year so far, growth in this sector is just getting started.
Sorl Auto Parts Inc. (SORL) is a China-based auto parts manufacturer that sells brake systems and other safety equipment to more than 75 original equipment manufacturers.
While China is its largest market at this point, bear in mind that a Chinese carmaker owns Volvo, and the big car companies that are in China likely have to source some of their equipment through a local manufacturer, like SORL. It also has a lock on the heavy duty machinery and commercial trucking markets as well.
SORL is also now looking globally and is focused on expanding its markets to Europe, the U.S. and beyond. In FY15, international customers were about 28% of SORL’s revenue.
In the first quarter of this year, reported in mid-May, revenue was up 37% year-over-year and earnings were up as well as gross and net margins.
These kinds of numbers and the economic revival in China have helped send the stock up 65% in the past three months. And China isn’t even hitting its stride yet.
Camtek (CAMT) is an Israel-based testing equipment company that, with a mere $190 million market capitalization, is certainly punching above its weight. And it has been since its beginnings nearly 20 years ago.
Its recent move to sell its printed circuit board (PCB) business to a Shanghai private equity firm for $35 million is an indicator of where this this testing market sector is moving.
CAMT started in the PCB testing equipment business, but then Chinese and other Asian firms began to compete, so CAMT moved into semiconductor testing. There was plenty of opportunity there as devices were getting smaller and faster as mobile became the new hot thing.
Now, as virtual reality, the Internet of Things, artificial intelligence (AI) and autonomous vehicles blossom into actual industries, semiconductor testing has plenty of blue sky for companies like Camtek.
Up 42% in the past three months, this train is just getting rolling.
B. Riley Financial Inc. (RILY) is a small-cap stock that actually represents micro-cap and small-cap firms and has built out a boutique business with private equity, venture capital, and high net worth and institutional investors.
Basically, one arm of the company looks for companies that have the potential to become successful larger players and then it matches these firms up with investors that are interested in these ground floor opportunities.
It’s a unique niche to be sure, but RILY has proven to be successful at it.
And now is a good time to be in this game. Initial public offerings in tech have taken off compared to last year, and as long as the economy stays on a growth track, small firms will be able to gain traction and the market will start to look beyond the big caps.
Up 24% in the past three months, the next half of the year plays well for RILY.
Nova Measuring Instruments (NVMI) is a metrology company. That means it builds measuring equipment, specifically for the semiconductor manufacturing industry.
According to the World Semiconductor Trade Statistics organization, 2017 is on target to be the best year in semiconductor sales since 2010. Already, sales are expected to reach $378 billion this year. Tech think tank Gartner expects it be to be even larger, raising its 7.2% growth prediction to 12% for 2017, or $386 billion.
This is what is driving so many chip companies’ stock prices. And now that the big cap stocks are fully valued, many investors are finally turning their sights to the mid-caps and small-caps like NVMI.
It’s no surprise then that NVMI is up 78% year-to-date. The thing is, there is plenty of upside left because it was previously trading where unknown stocks that were off the industry’s radar screen were trading. That isn’t the case any longer.
OraSure Technologies Inc. (OSUR) is in the oral fluid diagnostics products sector. Basically, that means it specializes in products that can be used to test for anything from HIV, to blood alcohol/drug levels, to hepatitis C (HCV) using your saliva. It also has a cryosurgery division and sells equipment for forensic uses as well.
This may seem like a small backwater of a market sector, but OSUR has a market cap of $1 billion. This isn’t some dusty corner of the medical diagnostics market. And regardless of what comes of healthcare policy, this kind of easy and quick testing equipment will be in growing demand.
The whole point of healthcare reform in the U.S. is to provide great care for the least cost and these kinds of tools will allow that to happen.
And now that OSUR has an established reputation, it can work on diversifying its technologies to other areas and grow its revenue base. What’s more cheap effective testing of diseases like HIV and HCV are in great demand around the world.
Proof: OSUR is up 102% year-to-date and is still trading a current price-earnings ratio of 34.
Kulicke and Soffa Industries Inc. (KLIC) calls itself a packaging company for the semiconductor industry. That makes it sound like it wraps bubble wrap around a shipment of chips and sends them off to a client. In reality, KLIC makes the equipment that takes chips and arranges them on circuit boards for use in everything from Big Data servers to smartphones to high-end displays and televisions.
These machines are crucial to assembling the next generation of chips for the next generation of technologies that we’re seeing develop in every sector of the marketplace.
And KLIC isn’t some new face that just got in the game. It has been around since 1951. By 1956 they were building semiconductor chips. Now headquartered out of Singapore, it is one of the most rock-solid brands in the tech sector today because it has never overreached. It remains focused firm with a $1.5 billion market cap.
When times are good, Kulicke benefits. Right now, KLIC stock is up 36% year-to-date, but it only trades at a current P/E of 17. And it just upgraded its outlook for the rest of the year.
This article is from Louis Navellier of InvestorPlace. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.
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