These Stocks Have Great Growth Potential


Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you'd like to add some small-company stocks to your portfolio, the Vanguard Small Cap ETF could save you a lot of trouble. Instead of trying to figure out which companies will perform best, you can use this ETF to invest in lots of them simultaneously.

The basics
ETFs often sport lower expense ratios than their mutual fund cousins. The Vanguard ETF's expense ratio, which is its annual fee, is an ultra low 0.10%.

This ETF has performed well, beating the S&P 500 over the past three and five years. As with most investments, of course, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.

Why small caps?
It's common, and reasonable, to invest in lots of large-cap companies, as they've typically proven themselves enough to grow large, and tend to have some competitive strengths. But it's also smart to include smaller companies in your portfolio, as the best of them can grow rapidly and eventually become large caps.

More than a handful of small companies had strong performances over the past year. Natural-gas specialist Cheniere Energy soared 75%, with investors excited about its plans to build a liquid natural gas (LNG) export terminal to ship gas procured relatively inexpensively here to regions where it can be sold at a much higher price. They also like the stability that the company's planned long-term contracts should offer. It's currently income-poor, but seems to have some long-term gains locked in. The stock is trading near a 52-week high.

American Capital , a business development company (BDC) that's also involved in mortgage-backed securities, surged 68%. It was upgraded in February by analysts at Zacks, who liked its expense and debt reduction, along with better-than-expected earnings. But more recently, Wells Fargo analysts downgraded the whole BDC sector, citing heightened credit-market risks and steeper valuations. Some are hoping that American Capital will reinstate its dividend in the near future, as management has said it would like to do. In the meantime, it has been buying back shares, which isn't always the best thing for a company to do. There's a case to be made, though, that the company may be too inscrutable for most investors.

United Rentals gained 26%, renting out construction and industrial equipment, among many other things. Though its P/E ratio of 68 looks steep, its forward P/E of nine is much more attractive, suggesting strong expected growth. Indeed, revenue has been growing at a double-digit clip over the past three years, though free cash flow is negative. Along with its fourth-quarter earnings, the company reported working on paying down debt, and expects to have significant free cash flow in 2013. It also pointed to its successful diversification from its previous focus on construction.

GNC Holdings advanced 15%, offering health and wellness products in the U.S. and abroad. It benefits from more than 2,000 store-within-a-store locations in drugstores and elsewhere, and has been buying back shares of its stock. In its fourth quarter, it topped earnings expectations, though revenue fell a bit short. Management noted a growing customer base, operating margin, and market share. The company faces online competition, but it is finding some success with its Gold Card, which now sports nearly 6 million active members.

The big picture
A well-chosen ETF can grant you instant diversification across any industry or group of companies -- and make investing in and profiting from it that much easier.

To learn more about a few ETFs that have great promise for delivering profits to shareholders in a recovering global economy, check out The Motley Fool's special free report, "3 ETFs Set to Soar During the Recovery." Just click here to access it now.

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Longtime Fool contributor Selena Maranjian, whom you can follow on Twitter, has no position in any stocks mentioned. The Motley Fool recommends Wells Fargo. The Motley Fool owns shares of Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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