2014 was a tough year for small caps with the Russell 2000 Small Cap Index underperforming the S&P 500 by nearly 8%. This trend should reverse in 2015. Small cap stocks are more closely correlated to the domestic economy and an improving economy combined with the low-interest rate environment should benefit small caps more substantially that their larger counterparts. With this theory in mind, here are a few small cap stocks that could be winners in 2015:
TubeMogul (TUBE) – Market Cap: $671 Million
Tube Mogul is capitalizing on the shift in consumer video viewing habits to digital video. As more and more consumers are getting their video content on smartphones and tablet computers, TubeMogul has first-mover status in digital branding and a proprietary technology model that allows advertisers to create, monitor, and measure branding campaigns using a self-serve platform. TubeMogul’s programmatic ad-buying software eliminates the need for costly sales persons and ad buyers and allows brand advertisers to focus their talents on custom advertising strategies and targeted advertising campaigns. In other words, TubeMogul offers brand advertisers something very valuable: efficiency!
The digital video market is projected to grow at a 28% compounded annual growth rate and TubeMogul has been executing within this space beating analysts estimates year-over-year in the most recent quarter:
- Beat analysts revenue estimates by 26%
- Beat analysts EPS estimates by a whopping 333%
- Guided Q4 higher than analysts estimates by 9% on the high-end (February 2015 report date)
Year over year, TubeMogul’s spend increased 144%, yet revenue was up 112%, gross profits were up 126% and margins expanded from 66% to 70%. These numbers indicate excellent execution by the management team at TubeMogul and point to great things to come in 2015.
Ambarella (AMBA) – Market Cap: 1.5 Billion
Ambarella Holdings develops low power high-definition and Ultra HD video compression and image processing solutions that are used in high-definition cameras. Ambarella components are found in sports cameras like the GoPro (GPRO) camera line, in wearable cameras like the Digital Ally (DGLY) camera line, in automotive dash cameras and back-up cameras, and in security internet protocol cameras.
Ambarella has been experiencing significant growth with year over year revenue growth of 42.8% and year over year earnings growth of 100.8%. In addition to this growth, Ambarella has been beating analysts estimates:
- Beat analysts revenue estimates by 5% (most recent quarter)
- Beat analysts EPS estimates by 25.9% (most recent quarter)
Ambarella has a number of catalysts that could lead to more significant growth in 2015:
- With the recent media attention on law enforcement use-of-force incidents, police departments across the United States are looking at the potential use of body cameras. President Obama even announced $75 million in federal funding for these cameras. A boom in body cam sales is a win for Ambarella.
- Drones have captured the imagination of Americans and even companies like Amazon (AMZN) are experimenting with their commercial use. Ambarella processing solutions have a high penetration in this area. A boom in drone sales is a win for Ambarella.
- In addition to the above, a new partnership with AT&T for IP security camera solutions will create a new revenue stream.
Ambarella also provides a margin of safety with $186 million in cash, $0 debt, and a current ratio of 5.78.
MiMedx (MDXG) – Market Cap: 1.23B
MiMedx is a processor, marketer, and distributor of human amniotic tissue. Through its “Give the Gift of Healing” program, MiMedx obtains amniotic membrane tissue that would otherwise be discarded. Mothers, who deliver healthy babies by Cesarean section, can donate the placenta. MiMedx’s patented technology allows the amniotic tissue to be dehydrated and sterilized, creating an easy to use graft that can be stored at room temperature and has a five-year shelf life. These allografts have proven to be a facilitator of wound healing and are being used to heal lower extremity ulcers, to treat burn victims, and in many surgical applications.
MiMedx has been meeting or beating analysts revenue estimates for 12 consecutive quarters and EPS has been increasing for 5 consecutive quarters with Q3-2014 marking the first quarter that MiMedx became earnings positive. MiMedx also sports an impressive 88% gross margin.
MiMedx has several growth driver’s and potential catalysts for 2015:
- Recent non-exclusive distribution agreement with Zimmer Holdings (ZMH)
- Four new products to be announced in 2015
- MiMedx CEO Pete Petit is a serial seller of medical technology companies. He has a track record of building these companies and selling them at a premium for shareholders. MiMedx recently hired Christopher Cashman as an Executive Vice President; in the press release they twice mentioned his experience in mergers & acquisitions. This hire could be foreshadowing a potential buyout of MiMedx at a premium for shareholders.
- In a recent release, MiMedx announced that they will beat the high-end of their revenue guidance for Q4-14 and the full year.
Methode Electronics (MEI) – Market Cap: $1.39 Billion
Methode Electronics engineers, designs, and manufactures application specific technology across a multitude of industries on a global scale. It holds 290 patents in areas such as touch-screen technology, lithium-ion battery management technology, and digital printing to name a few. Methode is heavily tied to the automotive industry but has been diversifying its product mix as of late.
Methode Electronics has been beating analysts estimates for several quarters. They just reported on December 11th, 2014 and beat analysts revenue estimates by 4.71% and analysts earnings estimates by 20%. On a year over year basis, Methode Electronics grew revenue by 30.4% and EPS by 57.4%. Gross margins at Methode have also been rising from 9.5% in FY13 to 13% in FY14.
Methode Electronics has some catalysts that could drive the share price higher in 2015:
- The National Automobile Dealers Association predicts that $16.9 million light vehicles will be sold in 2015. Continued bullish automotive sales bodes well for Methode.
- 2015 should be the year that Methode experiences revenue from the Dabir Surfaces product. Methods has previously hinted that this product could produce $200 million in yearly revenue. Considering Methode’s total revenue projections for FY15 are $870-$885 million, a product with $200 million in yearly revenue would result in 23% revenue growth for Methode.
Methode appears undervalued with a PEG ratio of .65 – investors are only paying 13x for earnings growth of 57% and projected FY15 free cash flow of $75 million. In addition to this, Methode provides a margin of safety with $135 million in cash and a 3.24 current ratio.
TubeMogul, Ambarella MiMedx, and Methode Electronics all appear poised to capitalize on the anticipated favorable market conditions for small cap stocks in 2015.
Disclosure: I am long $TUBE, $MDXG, and $MEI