The Five Worst Small Caps of 2015
A Forecast for Small Caps in the Year Ahead
At the end of the year, I like to look back at what worked in small-cap stocks. The exercise is useful for reminding investors what to look out for. I’m also always curious to see what stocks made investors really rich, and which ones caused the tears to flow.
With the stock market falling 1% in 2015, the backdrop for diversified stock portfolios wasn’t good over the last year. Investors who were overweight consumer, health care and technology stocks might have done better as those sectors delivered positive gains. But performance really came down to the specific stocks you owned, and for the most part, avoiding energy.
Last Friday, I sorted through the iShares Micro Cap Index to see what worked and what didn’t. I pulled up all the current holdings, cut out the ones that weren’t trading on January 1, 2015, and sorted the rest by performance through the end of the year. Then I looked closely at the top and bottom five performers from different industries that had market caps under $1 billion, and skipped over a few that I didn’t find very interesting.
This is what I uncovered.
Top Small Cap Performers
Voltari (VLTC) – Information Technology, Market Cap: $53 million
With a 658% return, Voltari was the best performing stock in the micro cap index by a margin of 366%. Amazingly, the stock still only has a market cap of $37 million! The company develops predictive analytics, including data curation and modeling, that delivers digital marketing and advertising solutions to mobile devices. Customers are brands, marketers and advertising agencies. With the growth in mobile commerce, Voltari is in an undeniably hot industry. And 228% revenue growth to $12.2 million over the last 12 months is impressive, though the bulk of that came in the fourth quarter of 2014. Much of the stock’s advance came after March 31, when Carl Icahn disclosed a 52.3% stake in the company. Before Icahn spilled the beans, the stock was trading at 1.01. Since rocketing to 21.75, the stock has been trending steadily down and is now trading at 4.17.
Lesson learned: If you’re going to trade on big news, you’d better be quick to get in—and start taking gains early.
DS Healthcare Group (DSKX) – Consumer Staples, Market Cap: $57 million
DS Healthcare turned in an impressive 247% return in 2015. Like Voltari, this company is still tiny, sporting only a $57 million market cap even after the run. The Florida-based company develops hair growth, hair care and personal care products and technologies. It currently sells to 200 retailers, distributors and wholesale groups, as well as direct to consumers via its website. A cursory review of DSKX’s SEC filings and a little Internet research suggests that this is not exactly a legit business despite the share price performance. Stamped all over DSKX are accounting irregularities, IR and consultant payments and lawsuits, and a lot of other eyebrow-raising items that I wouldn’t expect to see with a healthy and well run business.
Lesson learned: A quick review of a company’s most recent SEC filings can often tell you if it’s worth digging any deeper—or running away.
Recro Pharma (REPH) – Health Care, Market Cap: $80 million
Recro’s 215% gain in 2015 came in March and April, when the stock surged from 3.30 to north of 14 on positive interim analysis for an acute post-operative pain medication, Dex-IN, that was a Phase II double-blind trial. At the time, Recro was a clinical-stage pharma company that specialized in developing non-opioid therapeutics for pain. In the second quarter, the company started generating royalty, profit sharing and R&D revenue, which along with stock offerings helped to shore up its finances. It also acquired the rights to meloxicam, a nonsteroidal anti-inflammatory drug, and manufacturing facilities from Alkermes. That acquisition, along with continued success of Dex-IN in trials, moved the stock up to a 52-week high of 18.30. But it’s been a downhill slide since mid-September, probably exacerbated by the “termination” of its CFO on October 12. The company is moving meloxicam into Phase III testing and Dex-IN is making its way through Phase II, so the stock is likely to move based on trial results.
Lesson learned: Biotech is an extremely exciting and potentially lucrative area for investment. But more stocks fail than succeed, and even the pros don’t know if a drug will ever make it to market. Average in and average out to spread your risk.
Cambium Learning Group (ABCD) – Consumer Discretionary, Market Cap: $215 million
Cambium made the grade by delivering a 192% return in 2015. The Dallas, Texas-based company develops learning solutions under the Voyager Sopris Learning, Learning A-Z, ExploreLearning and Kurzweil Education brands. It focuses on the $12 billion PreK-12 market. It went public at the end of 2009 and had a very rough start, falling well below 1.00 in late 2012. Since then, it’s had a start-and-stop recovery, but it launched from 1.75 to 2.50 in January, and then stair-stepped higher until November. It’s retreated modestly since, but compared to the other stocks on this list, Cambium is less volatile. The company made the strategic decision to move from a print to a digital subscription model in 2013, and it appears that was the right decision as bookings, revenue, cash flow and the stock price are all up (albeit, still down from 2011 levels). This is one to keep an eye on.
Lesson learned: The right business model for the times can make all the difference.
Impac Mortgage (IMH) – Financial, Market Cap: $150 million
With interest rates heading north, financial stocks are on many investors’ radar screens. And with a 190% gain in 2015, Impac deserves a closer look. The stock’s gains began accumulating right after the ball dropped at the beginning of the year and the stock began a four-month rally that carried it from 6 to over 28. Since then, it’s retreated to 15. The company’s tear sheet isn’t exactly exciting—it’s an independent residential mortgage lender that was founded in 1995. A few positive fundamental developments helped the stock over the last year though. First, it sold its non-qualified mortgage loans (non-QM) pipeline to Macquarie Group, Australia’s largest investment bank. Second, it acquired CashCall mortgage in January, a residential mortgage operation. CashCall had been a partner, with a growing business, so this appears to have been a good investment. Revenue over the last nine months of $131 million is a huge improvement over $32.7 million in the comparable nine months of 2014, and EPS of $5.61 versus a loss of $0.44 is a massive positive change. I think this is one to take a closer look at, but the details of the mortgages owned are important.
Lesson learned: Meaningful fundamental improvement in micro-cap stocks can send shares soaring.
Bottom Small Cap Performers
It was no surprise to see energy companies at the bottom of the pile in 2015. I won’t go into detail on these companies since I don’t want to encourage you to buy an energy or financial stock that lost over 90% of its value in 2015. But there are a few names here that you might recognize.
CHC Group (HELI) – Energy. Lost 93% in 2015
Goodrich Petroleum (GDP) – Energy. Lost 94% in 2015
Altisource Asset Management (AAMC) – Financials. Lost 94% in 2015
Emerald Oil (EOX) – Energy. Lost 95% in 2015
Penn Virginia (PVA) – Energy. Lost 96% in 2015
The Bottom Line
When 2016 closes out, I hope your small-cap investments have more in common with the top performers than the bottom performers! If you think you could use a little help to make that happen, remember to join me next Tuesday, January 19, for my Lunch With The Analyst webinar. I’ll be talking about the promise small-caps hold for the next year—both sectors and stocks—and taking questions. You can sign up for this free event here.
Your guide to small-cap investing,
Chief Analyst, Cabot Small-Cap Confidential 2.0