3 Small Stocks That Could Make Investors Rich

Despite economic challenges, the United States remains as a compelling hotbed of innovation. So many items in everyday use -- especially in the field of medicine -- got their start here. [In fact, Andy Obermueller recently revealed his favorite game-changing medical picks in the latest issue of Game-Changing Stocks]
The quest is always on to develop devices, drugs and services that help save money and boost the user's experience. And investors who get in early can be richly rewarded.

Of course, the path from idea to large-scale revenue can be excruciatingly slow at times. And up until now, these three companies were better known for consuming capital. But each of them has hit upon novel, potentially game-changing technologies that may eventually shower investors with riches.

BioLase Technologies (Nasdaq: BLTI)
Nobody likes going to the dentist. Memories of a metal drill boring into our gums linger long, and it's often a reason why people don't go to the dentist as often as they should. But Biolase has an alternative: Lasers that can cut dental tissue in a very precise fashion. As you know, the use of a drill usually requires that a patient be injected with Novocain since drilling and grinding can be quite painful. Lasers cause no pain and require no anesthetic. This shortens the amount of time a patient is in the dental chair, allowing dentists to see more patients in any given day. It also leads to much happier patients, making them more likely to maintain regular dental visits.

Yet the set-up can be expensive for dentists, which explains why only a minority have gone the laser route. In the first half of the past decade, sales grew sharply, hitting $67 million by 2007. Sales have since cooled and most recently outright plunged as the company was unable to see its products gain traction with key dental distributors such as Henry Schein (Nasdaq: HSIN). Shares of Biolase, which hit $18 in 2004, have lost 90% of their value.

Despite appearances, laser-based dentistry wasn't a bust. Instead, the company has been forced to re-think designs, remove costs from the manufacturing process, and alter sales incentive programs with distributors. The outlook for 2011 is perking up, setting the stage for the first year of sales growth since 2006.

Among the positive recent developments: Biolase has recently signed a second major U.S. distributor, Benco, that augments an existing relationship with Henry Schein. In addition, the company is rolling out new portable devices such as the iLase, which is off to an impressive start. The company is also now expanding into Asia.
Needham's Dalton Chandler sees 2011 sales rebounding more than 50% to $40 million, but even more modest sales growth at half that rate would likely put like put this former hot stock back on investors' radars. Shares of this microcap trade for around $1.50, but Needham predicts they'll double in 2011.

Research Frontiers (Nasdaq: REFR)
This company has led many investors to chuckle. Most of its press releases involve yet another round of capital-raising. The company has cracked the $1 million sales mark just once and has never come close to making a profit. But Research Frontiers may have the last laugh in 2011. The company's specialized glass technology, which automatically adjusts to filter out sunlight at times of high air-conditioning loads, has caught the attention of major construction firms, some of which are expected to use the glass in 2011.

But it's the auto market that has captured a great deal of recent buzz, pushing shares from $4 to $7 in the last three months. Mercedes apparently intends to use Research Technology's "Smart Glass" in an upcoming line of cars. Some suggest the technology will be adopted for the whole car line, and the company's most bullish supporters expect other auto makers to make similar moves in 2011 as well.

The rising stock price implies those rumors may have merit. But the company's history should give you pause. Research Frontiers has been oh-so-close to success many times before but thus far has been unable to capitalize on the opportunity. How big an opportunity does the company face? The automotive glass industry likely tops $5 billion and the architectural glass biz is similarly-sized. If only a small portion of auto makers and architects utilized the technology and Research Frontiers was able to secure a small percent of royalties, then the company may be looking at tens of millions in revenue, most of which would flow to the bottom line. Not bad for a company valued at just $122 million.

Sooner than later, we'll know if the Mercedes rumors are true. Several months from now, shares will either be well higher than current levels or they'll fall all the way back toward the $4 mark.

BSD Medical (Nasdaq: BSDM)
BSD's systems are used to treat certain tumors with heat (hyperthermia) while increasing the effectiveness of other therapies such as radiation therapy. Cancer cells can be killed at just 108 degrees, a lower temperature than other cells. As the body senses the heat in the treated area, it also moves to generate other benefits such as increased blood flow, which raises oxygen levels, which raises the effectiveness of radiation therapy. The clinical data in support of BSD's devices have been quite strong.

This is another company that has been long on promise but short on results. Sales cracked $5 million in 2008, but have been falling since. Shares, which hit $7 in late 2007, fell all the way to $1 this past summer before a recent rebound back to almost $5. The rebound comes from rising hopes that BSD's novel cancer treatment, which has proven to be effective, could soon win more converts as the company signs up a growing roster of distributors.

At this point, BSD must figure out ways to get the many customers that have been testing the system to make a purchase. Or the company needs to partner with -- or sell to -- a larger medical device firm that is better-equipped to tackle this "missionary" type sales effort. There's lot of promise here, but investors will need to see better sales traction in 2011.

Action to Take --> These stocks should never constitute core holdings in a portfolio. But if you have some discretionary funds that can be tapped to swing for the fences, these stocks may turn out to be tidy additions. I like the basket approach: A small position in several speculative plays. One home run can more than offset losers elsewhere.

Source:

David Sterman
Contributor, SmallStocks.com

An Undervalued Small Cap with a 12% Yield

Although you have probably never heard of this company, chances are you use its technology every single day.

Do you watch television, or use a computer? Have you bought an iPad or iPhone? Do you use a cell phone, digital camera or a GPS navigation system in your car? If so, then you're most likely using what this company makes.

Yet, despite the wide-ranging use of this company's products and the continuing proliferation of new devices that use them, this company's stock price has been stuck in the doldrums. But that could change soon...
Taiwan-based semiconductor company Himax Technologies, Inc. (Nasdaq: HIMX) is one of the world's primary makers of chips used in flat-panel display monitors. These chips are critical components used for large screens like TVs and computers as well as small screens such as those used for Apple's (Nasdaq: AAPL) iPhone, digital cameras and GPS navigation systems.
Himax sells its chips to the biggest and best in the business. Clients include Taiwan-based Chimei Innolux, the world's largest manufacturer of LCD monitors. Also among major clients for large and medium screens is Samsung Electronics (OTC: SSNLF.PK), the world's largest flat-panel TV manufacturer, and TPV Technology, the world's largest LCD TV maker. Clients that make small screens include Wintek, Apple's touch-screen manufacturer for the iPad and iPhone.

One would think that business should be booming as the recovery is gaining steam, but that hasn't been the case. Revenue in the first nine months of the year is actually lower than the year ago period by 2%, totaling $501 million. Earnings per share (EPS) have fallen from $0.15 per share in the same period last year to $0.12. In the third quarter, revenue has plunged 32% from the year ago quarter. As a result, the stock is down 28% in the past year, compared with a 15% gain for the S&P 500.
What's going on?
The reason is simple. Demand for flat screen TVs is decreasing. It's decreasing because people in the United States and Europe have passed the rapid growth stage of upgrading to HD flat-screen digital TVs -- just about everyone has one already. The demand explosion that took place earlier this decade has run its course.
People are still buying TVs, but at a slower rate. In the first three quarters of 2010, global TV shipment growth slowed to 17%, from 26% in the year ago period. In the third quarter, sales of large panel display drivers at Himax fell 48% from the year ago quarter.
But here's the good news: the stock price already reflects the recent disappointing sales and there are still several strong catalysts for growth going forward...
The Chinese market
In addition to a growing middle class and increasing domestic consumption in China, the country will move to a digital TV standard by 2015. In the United States, the move to digital helped created a boom in the HD TV market. Currently only about 17% of Chinese homes with cable use digital, so there is potential growth of hundreds of millions of consumers in this market.

3D
Himax recently launched a 2D-to-3D conversion solution used in large screens that the company says has been widely praised as offering the best 3D effect in the marketplace. While 3D TVs have not taken off yet, they could see strong growth in the years ahead.

Small screens
Global proliferation of handsets with display screens is increasing demand for the chip used in small and medium-sized display screens. This segment of the company's revenue grew 11.8% in the third quarter and now contributes more than one quarter of revenue.

In addition, Himax is in stellar financial shape, with just $44 million in debt and $392 million in shareholder's equity and $80 million in cash as of its most recent filing (Sept. 30). The company is well-prepared to service increasing demand going forward through expansions and acquisitions.

And then there's the dividend. Despite the fact that Himax is an emerging-market technology company, it steps out of character by using its superior financial condition to pay a fat dividend. Dividends are paid once a year, and the company's 2010 payment of $0.25 per share gives the stock a whopping trailing yield of about 12%.

Action to Take --> The strong growth trends in Himax's business may take several quarters or more to come to fruition. However, given the current low price and the fact that the stock pays a double digit yield while you wait, it is a good buy at the current price.

Source:
Tom Hutchinson
Contributor, SmallStocks.com

3 Small Caps with 9%-Plus Yields

Are you an income investor or a growth investor? It's pretty much been accepted as common knowledge that a stock either offers great dividends, or great potential for price appreciation, but not both. If you look hard enough though -- and far enough down the market cap scale -- every now and then you'll find a double-barreled name that serves up the best of both worlds.
In fact, there are three such ideas I've found worth considering today.

Small cap yield # 1: 9%
Though categorized as a credit services stock, that's not actually what Fifth Street Finance Corp. (NYSE: FSC) is. It's mostly a business development company, or BDC, offering conventional and bridge financing to smaller but established business. Many of the loans, however, include an equity component… which is where the growth opportunity is packed in for Fifth Street's shareholders.
Whether you define it as a fund, a BDC, or just a conglomerate, one thing is undisputable -- Fifth Street Finance knows how to drive consistent income, the bulk of which is passed along to shareholders.
While 2010 was a bit of an off year, with the company only earning $0.95 a share, 2011's earnings are expected to reach $1.17 a share.
Astute investors will notice that the trailing dividend yield of about 10% is slightly greater than the recently-projected earnings yield of 9.3%... a scenario that seemingly can't last indefinitely. Don't sweat it. The financier closed more than $270 million worth of new loans in the yet-to-be reported quarter ending at the end of December. That was by leaps and bounds the busiest quarter the company had seen all year, pointing to one key theme: business is picking up. The dividend rate should be easy to cover by mid-year at the current pace of business.

Small cap yield #2: 10%
With a dividend yield around 10% and a price-to-earnings (P/E) ratio of about 9, Israeli telecom Partner Communications Co. (Nasdaq: PTNR) may well be one of the market's best-kept secrets.
In fact, Partner Communications is on pace to turn in its best year ever on the revenue and income fronts: analysts are looking for $6.5 billion in revenue and earnings per share (EPS) of $7.97. That's 6.9% and 8.1% higher than 2009's respective numbers, a feat underscored by five straight annual EPS increases and revenue increases in four out of the past five years. Yet, the market continues to overlook the stock. Big mistake.
Partner Communications has not only upped its bottom line in the past few years, but it's also increased its dividend payout accordingly. For perspective, shareholders received a total of $1.33 a share in dividends in 2006, but owners took in $2.09 a share in regular dividends in 2010.
The point is, the dividend is well protected, and growing with the company.

Small cap yield #3: 9%
And finally, Triangle Capital Corp. (NYSE: TCAP) is another one of those off-the-radar ways to score some nice income on your investments while waiting for capital appreciation.
Like Fifth Street Finance, Triangle Capital is predominantly a business development company. And, like Fifth Street, Triangle Capital has gotten strangely good at driving consistent income. Like Partner Communications, however, Triangle Capital has clearly paired bigger bottom lines with better dividend payouts.
As of the last tally, the forecasted earnings per share for 2011 is $1.67. That's actually a little more than enough to cover the $1.65 worth of dividends -- a yield of about 9% -- paid out in 2010. Considering we're starting to see more earnings beats than misses from Triangle, however, don't be surprised if both figures inch higher this year.

Things to consider
But two small cap business development companies in the same portfolio -- each of which specializes in small company financing? Isn't that a tad concentrated, like owning two mutual funds from the same style box?
In some regards yes, but in most regards, no.
One of the advantages a BDC has that investors can't find anywhere else is a BDC's ability and willingness to invest in small, growing companies that are investment-worthy, but not always publicly-traded. These are the stocks that are most like the Amgens and Microsofts from 20 and 30 years ago, when each was a great idea practically nobody had heard of at the time (even if they were publicly traded then). But, each BDC has very unique investment opportunities presented to it that rarely make their way in front of other business development companies.
So, the industry actually offers a lot of built-in diversity, and more importantly, it offers the one-two punch of income as well as growth.

Action to Take --> It's tough to find the best of both worlds, but not impossible. Clearly though, you have to look at the smaller end of the stock size scale to find a decent selection of names with both good growth and income potential. And, you generally have to move quickly when you see such an opportunity, simply because other investors are looking for the same assets and can bid them up before you step in. Any of these three names mentioned are good options for investors.

Source:

James Brumley
Contributor, StreetAuthority.com