These Companies Are Small and Growing

These Companies Are Small and Growing

Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you'd like to add some small-cap growth stocks to your portfolio but don't have the time or expertise to hand-pick a few, the iShares S&P Small Cap 600 GrowthETF 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 iShares ETF's expense ratio -- its annual fee -- is a low 0.26 %.

This ETF has performed well, topping the large-cap S&P 500 index over the past three, five, and 10 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-cap growth stocks?
It's smart to include smaller companies in your portfolio, as the best of them can grow rapidly and eventually become large caps. It's smart to seek undervalued stocks, as value investors do. But it can also be appealing to add some "growth" stocks to your portfolio, in the hope of juicing its overall performance. Such stocks offer significant growth potential, and some of them are undervalued, too.

More than a handful of small-cap growth companies had strong performances over the past year. Questcor Pharmaceuticals tripled, gaining more than 30% on July 31 alone, after the company posted very solid second-quarter earnings. Earnings were up 72% over year-ago levels, with revenue up 64%. Questcor is largely known for its multiple-sclerosis (MS) drug, Acthar, that has sold well in the past, and is being evaluated for many more indications, such as in pulmonology. Questcor's management is extremely well regarded and its dividend was hiked by 25% earlier this year. Even with its stock-price rise, it looks attractive. The stock took a bit of a hit recently on news of some insider selling. But insider selling isn't necessarily ominous. Some criticize Questcor for being too centered on Acthar, but it's doing a lot with the drug and has been performing quite well.

Portfolio Recovery Associates surged 73%, and is near a 52-week high. Portfolio Recovery is a debt collector, buying defaulted debt from lenders and then collecting pennies on the dollar -- which still results in healthy profits. Indeed, the company's net margin was recently above 20%. Free cash flow has roughly doubled from $81 million in 2009 to $164 million in 2013. Analysts at Zacks recently upgraded the stock to a strong buy on its improved performance and growth.

ViroPharma jumped 28%, in large part on speculation that the maker of drugs for rare diseases will be bought out at a premium. Think twice before making investment decisions based on speculation, though. Analysts at Merrill Lynch have downgraded the stock based on risks tied to its key product, Cinryze, which treats the rare condition of hereditary angioedema.

Darling International , a food-waste recycler and the nation's biggest publicly traded renderer, gained 18% -- in part for its promising acquisition of a rendering and biodiesel business and its international expansion. Bulls are excited that its biodiesel joint venture with Valero Energy is now up and running, and some see it as a good time to buy into the company. Analysts at Cannacord Genuity recently upgraded the stock from hold to buy, but Zacks downgraded it to strong sell. Darling's net income and free cash flow have fallen in recent years, but they're solidly in the black.

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.

So many to choose from
This isn't the only interesting ETF out there. You can learn more about a few ETFs that have great promise for delivering profits to shareholders by checking out The Motley Fool's special free report "3 ETFs Set to Soar." Just click here to access it now.

The article These Companies Are Small and Growing originally appeared on

Longtime Fool contributor Selena Maranjian, whom you can follow on Twitter, has no position in any stocks mentioned. The Motley Fool recommends Darling International and Portfolio Recovery Associates. 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.

Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.