Wall Street pros have nothing on retail investors who stake small sums of money monthly on undervalued small-cap stocks. Because the big guns mostly ignore them, these types of stocks offer the best outsized opportunities for growth.
We'll screen for stocks under $3 billion in market cap that offered earnings surprises of 15% or more in the previous quarter, with long-term earnings growth forecasted to be at least 15%. We'll then filter our findings through the collective investing wisdom of the Motley Fool CAPS community and those they think have the best chance for winning.
Here are some of the stocks this simple screen found:
EPS Actual vs. Estimated
Average Analyst 5-Year EPS Estimate
CAPS Rating (out of 5)
Bio-Reference Labs (NAS: BRLI)
Retail Opportunity Investments (NAS: ROIC)
Sources: Yahoo.com and Motley Fool CAPS.
Of course, this is not a list of stocks to buy -- just a starting point for more research. We need to look more closely at these companies to see whether analysts' faith in them is well-founded.
Testing new highs
The warm weather may have contributed to Bio-Reference Labs' better-than-expected earnings results, as more patients could come out to get tested, but the regional, full-service clinical testing lab is finding its operations across the board. It might not have the reach of either LabCorp (NYS: LH) or Quest Diagnostics (NYS: DGX) , but its operations are performing better all around, with its women's health business seeing substantial growth and the oncology division expansion continuing unabated.
Its stock has certainly come a long way since last November, when a website published spurious claims of fraudulent activity. I dismissed the claims then as based on little more than innuendo, while discussion-board chatter presented it as fact. Even Bio-Reference got into the act, of course declaring the claims as half-truths but also announcing a buyback program to take advantage of the severely discounted stock. It ended up purchasing more than 170,000 shares at a cost of almost $2.9 million.
I also marked the stock to outperform on CAPS, believing those who had run furthest from the stock the fastest in the wake of the report would return and bid up the shares. The stock has rebounded 86% from its lows, and there seems little to suggest it can't go higher still now that the ugly rumor-mongering is behind it.
Tell me on the Bio-Reference Labs CAPS page whether you think it will test new highs, and then add the stock to your Watchlist to see whether it remains fleet of foot.
Stripped of all the trappings
Unlike big mall operators such as General Growth Properties or Simon Property Group (NYS: SGP) , real estate investment trust Retail Opportunity Investments owns a few dozen shopping centers that feature "necessity-based" stores and are typically anchored by supermarkets or pharmacies. These are the places you want to run in and out of to get your hair done, pick up your prescriptions, and grab a few groceries before heading home. Look at it as the king of the strip mall.
While you'll typically find Kroger or Walgreen, Safeway or CVS holding down one end of these shopping centers, ROI does have department-store giant J.C. Penney in one mall, though the store is unoccupied.
The middle stores are more commonly smaller shops or regional businesses, so if the economy is turning for the better, these companies ought to be the barometer of health and end up serving as the driver of future growth for the REIT. So far, so good, as ROI sees demand for its space on the upswing, and it's looking to make more acquisitions in 2012.
CAPS member TDSWIM says with the long-term leases it has in place, Retail Opportunity is an opportunity for investors. My only concern is that I think the economy is in far worse shape than whatever the media is indicating. According to economist David Rosenberg, 11 of 13 economic indicators have missed expectations recently, and the two that met or exceeded them are jobs and autos, both subject to significant manipulation.
For that reason, as hopeful as management sounds for the coming year, I'm going to mark ROI to underperform the broad indexes, but add Retail Opportunity Investments to the Fool's free portfolio tracker and tell me in the comments section below whether you think that stripped down to its essentials, this shopping-center operator has more room to grow.
Foolish final thoughts
These companies may have the odds stacked against them, but The Motley Fool has identified two stocks that are also facing difficult times yet still grow revenues hand over fist. The report is free, but it's available for only a short time, so ask for your copy today and find out the two cash kings that are changing the face of their industry.
At the time thisarticle was published Fool contributorRich Dupreyowns shares of Bio-Reference Laboratories, but he holds no other position in any company mentioned. Check out hisholdings and a short bio. The Motley Fool owns shares of Retail Opportunity Investments and Bio-Reference Laboratories.Motley Fool newsletter serviceshave recommended buying shares of Laboratory of America Holdings, Retail Opportunity Investments, and Quest Diagnostics. The Motley Fool has adisclosure policy. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.
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