High-Risk, High-Reward Small Caps

This article is part of ourRising Star Portfolios series.

I'll be gathering more small- and mid-cap candidates for my Rising Star "multivitamin" portfolio over the next few days via my Foolish 8 and modified Foolish 8 screens. Today I present the Foolish 8, which was developed by Motley Fool co-founder David Gardner to identify profitable, rapid-growth, small-cap stocks. Here are the eight criteria:

  1. Revenues: $500 million or less.
  2. Earnings and sales growth: 25% or greater.
  3. Netprofit margin: 7% or greater.
  4. Daily dollar volume: $1 million to $25 million.
  5. Insider holdings: 10% or greater.
  6. Share price: $7 or greater.
  7. Relative strength: 90 or greater.
  8. Operating cash flow: a positive number.

The contenders
This month, 12 companies passed the screen:


Market Cap (in Millions)


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Altisource Portfolio Solutions$1,166Real estate management and developmentAdd
Bank of the Ozarks$1,050Commercial banksAdd
CVD Equipment$74Semiconductors and semiconductor equipmentAdd
Epoch Investment Partners$541Capital marketsAdd
Gulfport Energy (NAS: GPOR) $1,711Oil, gas, and consumable fuelsAdd
HFF (NYS: HF) $466Capital marketsAdd
Hi Tech Pharmacal$458PharmaceuticalsAdd
IPG Photonics (NAS: IPGP) $2,226Electronic equipmentAdd
Keynote Systems$353Internet software/servicesAdd
Nanometrics (NAS: NANO) $412Semiconductors and semiconductor equipmentAdd
Twin Disc (NAS: TWIN) $443MachineryAdd

Source: S&P Capital IQ.

Three companies are on my short list for further research:

  1. IPG Photonics is, for me, the most solid name on the list. This longtime Fool favorite makes high-performance fiber lasers for numerous industries, and is a disruptive force in the market. It features outstanding returns on equity and 26% insider ownership, and it's reasonably priced considering its potential.
  2. Nanometrics is in the business of saving money for semiconductor manufacturers by improving their yields and productivity. The company does incredibly complex stuff (official term) involving the measurement and control of certain processes, and does it well enough to generate strong returns on investment. Also, at least one analyst thinks Nanometrics may be a takeover target.
  3. Gulfport Energy is involved in the exploration and development of oil and gas -- primarily along the Louisiana coast and the Permian Basin, though it has some international exposure also. It somehow maintains an impressive 46% net margin, well ahead of the industry average.

In addition, if you're not in the mood for volatility -- relatively speaking, as all small caps can be volatile - you might want to avoid Gulfport Energy, as well as mortgage investment firm HFF and transmission-maker Twin Disc. Their five-year betas are right around 2.5, easily the highest of the bunch.

I hear CAPS calling
I'm tracking and scoring each one of my monthly screens now, so we can see exactly how they're performing. We refer to it as a CAPScall around these parts, and the Foolish 8 has its own page. Just add it as a favorite to keep up.

After the holiday weekend, I'll show you the results of this month's modified Foolish 8 screen and then talk about the companies that interest me from both screens in more depth.

If you're interested in keeping up with any of these businesses, add them to your free watchlist by clicking the "add" button in the far-right column of the table. You can also follow me on Twitter and check out the multivitamin discussion board.

At the time this article was published Fool analyst Rex Moore reminds you that time holds the winning hand. He owns no companies mentioned in this article. The Motley Fool owns shares of IPG Photonics.Motley Fool newsletter serviceshave recommended buying shares of IPG Photonics. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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