By Johan Albrecht
It is common to see annual reviews and predictions for the future towards the end of a year. These articles are popular as investors re-diversify their portfolio and look to find a strategy and new ideas for the upcoming year. One strategy is to ride the momentum of strong performers, as some stocks often post multi-year gains. So in this article I am reviewing the best performing small cap stocks of 2012. These are stocks that meet a certain criteria, with a market cap below $225 million with more than 100,000 shares traded per session; and some might just continue into 2013 with even larger gains.
Security National Financial Corp. (NASDAQ:SNFCA) is the best performing stock that no one ever talks about, with an annual return of 518%. Unlike most small cap stocks, this is a company that has seen a rise because of fundamental strength and growth. The company has consistently seen improving fundamentals, including a near 55% rise in revenue during its last quarter. Security National Financial (SNFCA) is among the only companies of its size that pays a dividend; when combined with the fast growing lending process industry it is clear to see how investors have been optimistic in 2012.
Security National Financial (SNFCA) is a difficult assessment because it is under-the-radar. It does not receive any coverage, does not have any price targets or calls for the upcoming year, and the engagement of investors is low. It has a $200 million market cap and compared to its fundamentals it is still cheap, despite its return. Its institutional ownership is only 1%, most likely because no one has ever heard of the company, and because it was a $30 million company back at the start of the year when funds were rebalancing. It is possible that due to its rise that we will see an increase in institutional ownership in the first two quarters of 2013, and hopefully the industry strength can maintain optimism for those who own. My only concern is that the information surrounding the company is limited, which can be a real cause for concern. With all things considered, I’d wait before buying, but acknowledge that real upside exists assuming it can maintain fundamental growth.
Consumer Portfolio Services Inc. (NASDAQ:CPSS) is another under-the-radar stock that has performed with large returns in 2012, 475%. Much like Security National Financial (SNFCA), shares of Consumer Portfolio Services (CPSS) have been pushed higher due to fundamental growth and a strong outlook for its industry. The company is an automotive finance lending business, and as we all know, auto sales have been strong in the last two years. Consumer Portfolio Services (CPSS) has been able to capitalize on this market with strong demand for its indirect financing to customers with limited credit histories, low incomes, or past credit problems.
Consumer Portfolio Service (CPSS) is seeing strong growth as consumers buy new vehicles, but because of the company’s clientele, it operates in a very high risk/high reward business. The customers who utilize the company’s services typically have higher interest rates, which can be profitable for the company, but also devastating in a down economy. Back in November, Seeking Alpha author “The GeoTeam” provided a very good and detailed assessment of the company, and provided three challenges: Minimize bad debt exposure; effectively manage the costs to acquire and service portfolios; maximize the spread between rates earned and costs related to its portfolio. These challenges are less damaging in a strong auto market, which we are enjoying. Considering that the company is trading with a single digit forward P/E ratio and is seeing 75% revenue growth, I do think upside is present. However, I would continue to monitor closely, as this is truly a high risk/high reward investment dependent upon the market.
TearLab Corporation (NASDAQ:TEAR) is a healthcare company that is the process of commercializing a tear testing platform. The optimism for this platform has created its 2012 return of 265% and has prompted Canaccord Genuity to believe that the U.S. market for this platform includes 50,000 eye specialists who see on average six dry eye patients per day; creating a potential opportunity of $1.8 billion. The company’s platform would be a first point of care because it can effectively measure and diagnose the disease.
If the company is able to capitalize on this market then its $116 million market capitalization is conservative. The company’s platform could become the standard-of-care for the condition that it treats and should result in profitability some time in 2014. Until then, the company is still burning cash quickly and will most likely continue due to the expenses associated with its launch. It is very possible that TearLab will dilute its shares in 2013 by raising cash, but if the platform is a success then it should have a minimal effect. The question is whether or not you believe the tear testing platform will be a large commercial success, because if it succeeds large gains will be created. As of now, revenue has been slow, with the company reporting just $2.85 million during the last 12 months, with $1.21 million during its last quarter. Therefore, the company must accelerate at a much faster rate to keep shareholders happy, which will be a concern to monitor in 2013.
Galena Biopharma Inc. (NASDAQ:GALE) is a biotechnology company that has seen a 220% gain in 2012 due to the success of its Phase 3 breast cancer vaccine, NeuVax. The vaccine targets a very particular subset of breast cancer patients, those expressing low or intermediate levels of HER2, and with these particular patients the vaccine has been very successful at preventing the recurrence of breast cancer. Earlier in December, the company presented the final results from its Phase 2 trial. The company said that just 5.6% of patients who received NeuVax had a recurrence, but 25.9% of patients who did not receive the vaccine saw a recurrence. Data such as this has led to large gains in 2012, a combination of bullish calls from analysts, patents, a partnership with Teva, and independent research that supports the effectiveness of Galena’s strategy in targeting HER2 and other biomarkers have all contributed to its rally.
Galena (GALE) is ending the year at the bottom of its range, after falling 26% in December. The company recently announced an offering to raise money to help finance its Phase 3 trial, giving the company around $40 million in cash. Seeing as how the risk of financing will not be present, and the presentation of interim Phase 3 results will occur in the second half of 2013, I think 2013 is setting itself up to be a great year for Galena (GALE).
At this time, there is no reason to believe that NeuVax does not work, as the product has been successful in every measurable way when targeting the specific patient group. Galena is currently trading with a $100 million market cap, and its vaccine has potential in the multi-billions if proven to be successful. Therefore, the stock is presenting a great risk/reward ratio, is priced attractively, and now that the company is finding partners (such as with Teva and Leica) it should see much lower costs in 2013. Piper Jaffray recently initiated coverage with an Overweight rating and $2.50 price target. Considering all things, this is one of the better speculative plays in 2013, with limited downside and large upside.
Vringo Inc. (NYSEAMEX:VRNG) has been one of the most talked about small-cap stocks in the market, over the last few months, because of its nasty faceoff with Google Inc. (NASDAQ:GOOG). At this time, Vringo has been the ultimate stock of speculation, as investors have attempted to determine the outcome of its court proceedings. In 2012, Vringo saw its valuation increase by 170%, but now more questions exist that might set Vringo investors up for another volatile year.
Seeking Alpha author PTSD Trader wrote one of the very best assessments of the case between Google and Vringo. The article entitled “Vringo vs. Google: Value in the Jury’s Mistake” takes a hard look at the verdict, the legal positioning, and various sides of the argument. Overall, I think it’s a must read for anyone considering this stock.
As of now, Vringo has been awarded nearly $30.5 million for past infringement and a future royalty rate of 3.5% for Google’s infringing technology of Vringo’s patents. However, the weeks that have followed have included one confusing scenario after the other. In short, Google is asking for a re-examination; and is questioning the factors that determined a royalty rate of 3.5%. However, Vringo’s attorneys feel the same, as the apportionment percentage remains a large question. The bottom line is that the upcoming year could be fueled by just as much speculation as in 2012. The good news is that Vringo has won, and will earn monies for past infringement and futures revenue. But what happens next is anyone’s guess. If the outcome is favorable, then Vringo presents the likelihood to trade greatly higher.
What’s neat about all of the companies discussed is that all have traded higher following a variety of catalysts, and have the potential to trade much higher in 2013. Far too often we see stocks in this category trade higher because of technicals, or for the wrong reasons. Each of these companies has questions surrounding 2013, but also fairly valued despite such large returns. I would monitor each stock for continued gains, because more than likely, several of these stocks will trade higher in 2013.
Disclosure: Long GALE