Start Small, Win Big

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 and sort long-term earnings growth forecasts of 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.


Market Cap

EPS Surprise > 15%

5-Year EPS Growth Estimate

CAPS Rating (out of 5)

Abiomed (NAS: ABMD)

$791 million




Silicon Motion (NAS: SIMO)

$620 million




Sources: 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
It was enough to get your heart pumping when medical-device maker Abiomed saw third-quarter profits easily beat analyst expectations, as sales of its heart pump soared 18% from the year-ago period. In particular, global sales for its Impella device surged 31% with year-to-date sales 34% higher. It sees sales running at more than $100 million annually for 2012 and thinks it can expand sales at a 30% clip.

The greater traction it's seeing in its heart assist products comes just as rival Thoratec (NAS: THOR) suffered a serious breakdown as its HeartMate II device, which accounted for the majority of its $422 million in revenues last year, was the subject of a recall by the FDA. Investors had heart palpitations earlier this month when the FDA reposted the recall notice on its website. While there's no actual recall in effect -- patients can still use the device -- it has significant implications for the company. Analysts have expressed wariness over Abiomed's growth potential because of a permanent device being developed by Thoratec. This stumble ought to provide the device maker with the chance to keep investor's hearts beating.

Although 30% of the CAPS members rating Abiomed are serious as a heart attack in thinking it won't be able to outperform the broad indexes, and shares have pulled back 16% from their highs, I'm rating the device maker to beat the Street going forward because it stands to grab mindshare and market share globally.

Tell me on the Abiomed CAPS page whether you feel the same, and then add the stock to your Watchlist to see if it can continue to pump news sales into its channels.

Developing a hankering for growth
If you want insight into how Silicon Motion will perform, keep an eye on how Samsung does, because as its biggest customer at 13% of revenues in 2010, it will direct what results the NAND flash maker posts. With earnings for SiMo set for next week, I'm betting we'll see some blowout numbers.

In late January, Samsung reported record numbers of its own, thanks to soaring sales of its Galaxy smartphone. Profits soared 76% from the year-ago period and were even 25% higher sequentially. As Nokia (NYS: NOK) continues to prove itself more irrelevant in the new smartphone era -- it recorded a huge $1.2 billion loss in the first quarter as Samsung and Apple (NAS: AAPL) caused a 40% drop in device sales -- Samsung will prove to be ascendant. Which means we ought to see SiMo follow in its wake.

CAPS member 4sigma notes that Silicon Motion's chips are used by all the big tech leaders -- Lexar Media and Sony are among its top five customers that account for 41% of revenues -- so he sees it still growing in the space. Of course, a breakdown by any one of those customers will wreak havoc with SiMo itself, as there is large risk in customer concentration like that, but I've still gone and rated the flash maker to outperform the markets over the next few years.

Add Silicon Motion to the Fool's free portfolio tracker and tell me in the comments section below whether you agree that it's no flash in the pan.

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 download 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 Apple, but he holds no other position in any company mentioned. Check out hisholdings and a short bio. The Fool owns shares of Apple.Motley Fool newsletter serviceshave recommended buying shares of Apple and Nokia and creating a bull call spread position in Apple. 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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