Wall Street pros have nothing on retail investors who stake small sums of money monthly on undervalued small-cap stocks. Because they're mostly ignored by the big guns, these types of stocks offer the best outsized opportunities for growth.
Below we screen for stocks under $3 billion in market cap, offering earnings surprises of 15% or more in the previous quarter, with long-term earnings growth forecast to be at least 15%. We'll then filter our findings through the collective investing wisdom of the Motley Fool CAPS community to determine those they think have the best chance for winning.
Here are some of the stocks this simple screen found:
EPS Act. vs. Est.
Avg. Analyst 5-Year EPS Est.
Affymax (NAS: AFFY)
Atmel (NAS: ATML)
Source: 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.
Taking aim at growth
With the first drug for anemia approved by the FDA in 20 years, investors have high hopes for Affymax to challenge Amgen's dominance in the space.
According to some analysts, Omontys may generate as much as $700 million annually in revenues by 2017 for Affymax. Market acceptance is expected to be large because it's a once-a-month drug rather than the three-times-a-week dose required for Amgen's leading Epogen. Doctors may want to prescribe it more to make it easier for their patients to stay on the drug regimen, and Medicare can save money in the process on reimbursement. Sounds like a win-win situation, unless you're Amgen, of course.
Yet as Human Genome Sciences (NAS: HGSI) found out with its lupus therapy, which was the first time in 50 years a treatment for the disease had been approved, the road to glory is not so easily traveled. Sales are increasing slowly, to be sure, but there are doubts about whether it can be the billion-dollar blockbuster it was originally touted as.
There is a key difference between the two, though. Lupus is not seen as immediately life threatening to patients whereas those Affymax's Omontys will treat are confronted with a potentially fatal loss of kidney function.
Shares of Affymax have doubled so far this year and more than tripled off their annual lows. Highly rated CAPS All-Star and biotech guru zzlangerhans thinks the obstacles to overcome are still too steep for the valuation the market has assigned to the stock:
Peginesatide must now displace entrenched competition in the dialysis population, despite the fact that it has neither stronger efficacy or better safety than the standard of care, and despite the fact that it had a worse side effect profile in the pre-dialysis population. Affymax's only avenue to compete is with a lower price, which I'm sure the makers of Epogen and Aranesp will find a way to counter. If I'm a nephrologist, I'm unconvinced.
Tell me on the Affymax CAPS page if you see the biotech stealing Amgen's share, then add the stock to your watchlist to see if it can live up to its potential.
Not so smart
The Android operating system from Google continues to dominate the smartphone space, commanding an awe-inspiring 56% market share, up from 36% just one year ago, as Samsung floods the market with handsets. For all the headline grabbing Apple does with its iPhone and iOS, it's far behind at a 22% share, up from 16% in the first quarter of 2011. It's impressive as well in being able to surpass Nokia's (NYS: NOK) Symbian system, but the real growth story here is Android.
Which is why Atmel's depressed stock seems like a significant buying opportunity. Shares are off 54% from a year ago, yet its chips are what drive the touchscreen interfaces on several Symbian and Android devices. And while it waits for Android tablets to gain traction, TriQuint Semiconductor and OmniVision Technologies continue to get recognition for their contributions to Apple products.
It appears to me that at these levels the market is pricing Atmel at virtually no growth, so I've rated it to outperform the market averages on CAPS, but let me know in the comments section below or on the Atmel CAPS page whether you think it can ride Android's coattails higher and then add the stock to the Fool's free portfolio tracker to see if it can burn up the charts again.
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 only available for 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 contributor Rich Duprey owns shares of Apple, but he holds no other position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool owns shares of Apple. The Fool owns shares of Google. Motley Fool newsletter services have recommended buying shares of Google and Apple. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. The Motley Fool has adisclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
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