After outperforming since the middle of 2018, large cap companies have been trading even with small cap companies for the past few months. The recent performance may be an indication of a shift to small cap stocks, particularly if the market were to take another leg higher in the coming months. Looking for investment opportunities with small companies that have quality balance sheets may provide the bullish leadership.
What’s in a balance sheet? The balance sheet includes the company’s assets, liabilities and equity. A company with no debt is a company that can’t go bankrupt. A company with little to no debt has less debt service that will take away from investing in the company. A measure for calculating how leveraged a company is using a ratio called debt-to-equity. The equity is calculated by subtracting the assets of the company minus the debt. The stocks on the list all have debt-to-equity ratios below 0.60 and have cash levels that are at least 1.5 times their debt.
When considering a company’s ability to grow its earnings, it’s important to see that they are keeping more of every dollar they bring in. The most important metric is operating margins since it considers expenses before taxes and interest expense, which may be more a consequence of management decisions for capital structure and taxes. All of the companies on the list have gross margins higher than 37%, operating margins higher than 15% and net profit margins higher than 15%.
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Here’s a list of six small- and micro-cap companies that have solid balance sheets and great margins.
Small Cap Stock #1: FutureFuel Corp (NYSE: FF)
FutureFuel is a Missouri-based company that is in the business of making biofuels and other types of fuel. The company has no debt and currently pays a 1.8% dividend yield. The company has had a strong price and volume trend over the past few weeks and has near-term potential to retest its 2019 high near $16.50.
Small Cap Stock #2: Caledonia Mining Corporation Plc (NYSEAMERICAN: CMCL)
Caledonia is a South African gold mining company that pays a 1.4% dividend yield. The company has little debt with an all-in sustaining cost (ASIC) of gold production at $810 to $850 an ounce. They are currently projecting a 45% increase in production growth as gold prices continue to rise. The share price has pulled back from its high near $30, but is poised to retest that level in the coming weeks.
Small Cap Stock #3: Brigham Minerals Inc (NYSE: MNRL)
Brigham Minerals operated a mineral royalty interest portfolio in the energy industry within the U.S. and Canada. As a royalty company that have no debt and don’t have the same risks as a traditional exploration and production company due to capital expenditures. The company has no debt and pays a 12.82% dividend yield. The stock has been declining but has earnings coming up on August 12 and potential to retest its June high near $15.50.
Small Cap Stock #4: Smith Micro Software, Inc (NASDAQ: SMSI)
Smith Micro is a software company for mobile and wireless service providers. Their SafePath Family is a platform for the internet of things (IoT) age to be used with wearables and trackers for children, the elderly, pets, cars and home security. The company has little debt and good cash levels.
Small Cap Stock #5: Collectors Universe, Inc (NASDAQ: CLCT)
Collector’s Universe provides authentication and grading services for collectors. If there is one are that has exploded during the pandemic, it’s been collectibles like trading cards, coins and other memorabilia. The company has moderate debt and good cash levels. With the recent pullback it provides a near-term potential to retest its high near $30.
Small Cap Stock #6: Paysign Inc (NASDAQ: PAYS)
Paysign is a company that provides prepaid card products and processing services, and can be used for corporate, consumer and government applications. The company has no debt and boasts gross margins of 55.78% and operating margins of 17.79%. After surging on June 25 on significant volume, the price has been forming a symmetrical triangle. A breakout above $10 provides a near-term target of $12 and an intermediate term target of $17.50.