Best Small Cap Companies To Own For 2014

At the beginning of the year, I authored an article laying out fifty predictions for 2013. The picks ranged from highly speculative to coin tosses that I believed had a better than average chance of going in my direction based on market strategies that have historically outperformed. Below I list the fifty predictions in bold with commentary on how this forecast has fared year-to-date. I have given myself letter ratings on each prediction. Feel free to assign your own grades in the comments section.

U.S. Stocks

The S&P 500 (SPY) makes a new all-time high, but closes beneath that plateau for the year. The S&P 500 eclipsed its former all-time high close of 1565 on March 28th, faster than I anticipated. With the index now ending the week above 1700 for the first time, closing below 1565 for the year seems a distant memory. Not everyone was calling for a new all-time high to be reached in 2013, and investment bank equity analysts were targeting on average high single digit annual gains at the beginning of the year. I did not expect a 19.9% return through the beginning of August, but I will take it. Grade: BThe equal-weighted S&P 500 (RSP) outperforms its capitalization-weighted alternative. The equal weighted index has produced a total return of 23.34%, besting the market capitalization-weighted S&P 500. Long-time readers know that I have long extolled the virtues of equal weighting. The lagging performance of former top holding Apple (AAPL), which has 1/14th of the weight in the equal weighted index has contributed to the outperformance of the equal weighted strategy. Grade: AThe Russell 2000 (IWM) outperforms the S&P 500 as small caps outpace large caps. The Russell 2000 has bested the S&P 500 by nearly five percent with the small cap index producing an impressive 24.8% return year-to-date. Grade: AThe shares of Bank of America (BAC) outperform J.P. Morgan (JPM) and Wells Fargo (WFC) on both an absolute and risk-adjusted basis. Bank of America has outperformed ! the broader market, producing a 28% total return year-to-date, but it has lagged Wells Fargo (32.1%) and J.P. Morgan (31.1%) while exhibiting higher volatility. Grade: C-The banking sector (XLF) outperforms the S&P 500. The Financial Selector Sector SPDR has produced a 27.9% year-to-date, besting the S&P 500 by roughly 8%. Grade: AHomebuilders (XHB) outperform the S&P 500, but not when adjusting for their variability of returns, which is over twice that of the broader market. Homebuilders, often extolled as top picks for 2013 given the domestic housing recovery, have lagged the S&P 500, producing a 16% total return that trails the broader market by roughly 4%. Trailing 200 day volatility has been 22% as compared to 12.4% for the S&P 500. Lots of investors were crowding into homebuilders in 2012, and this forecast was meant to highlight that alpha is only generated when outperformance is not achieved through simply taking more than proportional risk. Homebuilders have lagged and been much more risky than the market at large. Grade: B-Apollo Group (APOL), owner of the University of Phoenix, is taken private. Apollo Group is producing roughly the same amount of free cash flow as in 2006, but is trading at an enterprise value that is roughly one-sixth of its former level. Even despite the controversy over the efficacy of these for-profit learning institutions, and the wary eye of the federal government, I expect an investor to eventually lever up this still impressive cash generation machine. Grade: C-/IncompleteSafeway (SWY) spins off a portion of its real estate assets into a real estate investment trust, prompting a rise in the shares of the grocer. Safeway has produced a 40% total return and a 74% return over the last twelve months. When Seeking Alpha came out with its Alpha Rich article ideas, Safeway was going to be my first article, but my exposure as a lender to the company at my day job made this a conflict of interest to which I did not want to run afoul. I believed that the co! mpany, wh! ich had aggressively bought back shares in the past two years only to see its share price continue to swoon, would follow Canadian grocer Loblaw into the REIT concept. Low interest rates had increased the value of REIT equities, and a business that owned the company's real estate assets and leased them to the grocer could command a premium value while freeing up an additional capital expenditure budget that the grocer could use to streamline its business, reduce debt, or return additional capital to shareholders. Instead in April 2013, Safeway IPO'd a minority portion of its prepaid and gift card network, Blackhawk (HAWK), and in June 2013 Safeway sold its Canadian grocery assets to Empire's Sobeys Inc for C$5.8bn with proceeds used to buy back shares and reduce a debt level that had taken the company to the cusp of below investment grade ratings. Safeway appeared ripe for a reorganization of its assets and capital structure to drive value, and that is what has occurred in 2013, albeit in a slightly different form than I envisioned. Grade: B+Groupon (GRPN) is taken private for less than half of the value Google (GOOG) had originally offered the firm pre-IPO. Groupon has soared by nearly 80% in 2012 taking the value of the firm to roughly three-quarters of the $6 billion offer from Google. The increased valuation and limited EBITDA ($150mm) makes a takeover far less likely. Grade: DAn activist shareholder takes a major stake in Hewlett-Packard (HPQ), driving the stock to a market beating annual return. Hewlett Packard has returned a scintillating 89% year-to-date. I believed that the company's low valuation at the beginning of the year would invite activist shareholders, which failed to take place; however, lots of shareholders bought into the HPQ turnaround story, driving the stock to top percentile returns in the S&P 500. Grade: A-An activist shareholder takes a major stake in Dell (DELL), driving the stock to a market beating annual return. The MBO-led by Michael Dell and Silver Lake was proposed ! just week! s after this article, and has made Dell one of the most topical stocks of 2013. The stock is up 35% year-to-date while the future ownership of the company remains in doubt. The stock returned 30% in the month after this article was written. Grade: AEither U.S. Bancorp (USB) or PNC Financial Services (PNC) makes a major acquisition to broaden their geographic footprint, spurring further consolidation in the banking sector. I thought that USB or PNC would use their strong balance sheets to buy a footprint in the U.S. Southeast and chase the majors, but this has not come to fruition and regional banks have rallied strongly, increasing the sticker price on such a transaction. Every year prognosticators look north to the handful of oligopolistic banks in Canada and assume that the thousands of banks in the U.S. will choose to consolidate... maybe next year. Grade C-Johnson & Johnson (JNJ) loses its heretofore sacrosanct AAA rating, choosing to re-lever its balance sheet and return cash to shareholders amidst record low borrowing levels. The company is in the midst of a $2 billion share repurchase program and again increased its dividend, but both moves were consistent with their long-term conservative capital allocation framework. JNJ was rumored to be in the bidding for Bausch & Lomb, whose $10 billion price tag may have triggered a ratings downgrade given the amount of debt that would have needed to be absorbed. I continue to believe that debt levels consistent with AAA ratings is not the optimal capital structure given that JNJ had the ability to issue long-term debt with an after-tax interest cost roughly equal to long-run inflation. That window has likely closed given the backup in interest rates, but would still likely be value accretive given that the debt tax shield outweighs the increase in credit spreads from a more levered capital structure. Grade C-Berkshire Hathaway (BRK.A) makes an acquisition in the $20 billion enterprise valuation range. Berkshire joined 3G Capital to buy Heinz (HNZ) ! for rough! ly $28 billion (including assumption of debt) of which Berkshire's share of the purchase price was roughly $12 billion. The company later bought NV Energy (NVE) for $5.6 billion. Grade: A-My guess is Cummins (CMI). I was wrong, but weakness in Cummins' international markets for its diesel engines has seen the company grow comparatively cheaper (13.6% return year-to-date), and I think that this business would still be consistent with Berkshire's long-term objectives. Grade: D+Alcoa (AA) is the Dow Jones laggard as persisting unfavorable supply/demand imbalance in aluminum further weakens results and prompts a cut of the company's debt to junk. Alcoa is one of only two stocks (Caterpillar) in the Dow that have posted negative returns year-to-date, but Alcoa's -7.6% return has trailed all thirty constituents. The company's debt was cut to junk by Moody's in late May. Grade: A+Aubrey McClendon, co-founder and CEO of Chesapeake Energy (CHK), follows up a disastrous 2012 with a strong 2013 as rising natural gas prices drive company results, and his part-owned Oklahoma City Thunder win their first NBA championship. Aubrey McClendon resigned under pressure in April due to a shareholder revolt by Carl Icahn and Southeastern Asset Management. Natural gas prices rose early in the year, but are now flat. Russell Westbrook injured his knee in the playoffs and the top seed in the Western Conference bowed out in the conference semifinals in ignominious fashion to the Memphis Grizzlies. Chesapeake's stock is up fifty percent on the year, but this was a bad year for the former CEO and co-founder. The stock performance keeps this prediction above an F, but just barely. Grade D-Best Buy (BBY) outperforms Amazon (AMZN), which has only 60% of the EBITDA of its bricks and mortar retail competitor, but has a market capitalization 28x higher. Best Buy has returned 167% in 2013, and is the top stock in the S&P 500. Amazon has market performed with a 21% return. While everyone bemoaned the fate of brick-and-mortar retail, th! ey forgot! to notice the impressive free cash flow that the company still produces. Grade A+J.C. Penney (JCP) outperforms Macy's (M). In an additional high beta bet on a big box rebound, J.C. Penney has been a failed turnaround story and was forced to jettison their ballyhooed CEO, draw down on their revolver due to a meteoric cash burn, and lost a long-term major shareholder in Vornado. The JCP stock has returned -28% as Macy's has continued to be a shining "star" up 27% year-to-date. Grade FDomestic automakers outperform their Japanese competitors as the strong yen and the territorial dispute between China/Japan hurts auto exports of the Japanese firms. The domestic automakers are off to a strong start with Ford (+35%) and General Motors (+28%) outpacing the market. Toyota (+61%), Nissan (+32%), and Honda (+18%) have all benefited from a yen weakened by Abe's aggressive monetary accommodation that has benefited exporters. Grade B-Newspapers lose their taint as troubled investments as online subscription growth of local and regional periodicals expands. John Henry, owner of the Boston Red Sox, announced the purchase of the Boston Globe today for $70 million, a far cry from the $1.1 billion that New York Times paid for the paper twenty years ago. Berkshire continues to buy strong local papers, but newspapers continue to be a place for deep value investors only. McClatchy (MNI) is down 5.2% on the year. Grade C-Property and casualty companies finally see a mild year for weather catastrophes, boosting results. Not sure why I was trying to predict the weather other than the bad catastrophes we have seen over the past several years were bound to normalize. The S&P Property and Casualty Index is up 27.3% year-to-date, strongly outperforming the broader market. I can not think of a named storm in 2013. Grade: A-

International Stocks

Best Small Cap Companies To Own For 2014: Achillion Pharmaceuticals Inc.(ACHN)

Achillion Pharmaceuticals, Inc., a biopharmaceutical company, engages in the discovery, development, and commercialization of treatments for infectious diseases. The company focuses on the development of antivirals for the treatment of chronic hepatitis C; and the development of antibacterials for the treatment of resistant bacterial infections. Its drug candidates for the treatment of chronic HCV include ACH-1625, a protease inhibitor, which is in phase IIa clinical trial for the treatment of chronic HCV; ACH-2684, a pangenotypic protease inhibitor, which is in phase I clinical trial for the treatment of chronic HCV infection; and NS5A inhibitors for the treatment of chronic HCV infection, including ACH-2928, which is to enter a phase I clinical trial, as well as various additional NS5A inhibitors in preclinical development. Its pipeline of product candidates also includes ACH-702 and ACH-2881 for drug resistant bacterial infections; elvucitabine for HIV infection; and AC H-1095 for HCV infection. The company was founded in 1998 and is based in New Haven, Connecticut.

Advisors' Opinion:

• [By Brian Nichols]

  Achillion is an odd play because it has both the most upside and the most downside of any stock on this list. The company's developing and testing its hepatitis C treating drug, ACH-1625, which is currently in phase II. The results of initial testing have consisted of ups and downs, but after many years and a long process, ACH-1625, appears to be on the right track for an FDA approval.

  The upside in shares of ACHN comes from two places: encouraging data from trials and its likelihood of being acquired. In my opinion, ACHN has a very high chance of being acquired in the next 6 months. Both Pharmasset (VRUS) and Inhibitex (INHX) were acquired over the last 5 months with insanely large premiums. VRUS was purchased at a 81% premium and INHX for a 182% premium. ACHN is perhaps the most speculative, but it could also be purchased the cheapest.

  The stock's recently pulled back after a downgrade and is trading much lower over the last couple weeks. The stock's trend reminds me so much of INHX; the month following the VRUS acquisition when INHX traded higher by nearly 300%. But then after the one-month gain, INHX lost its momentum and traded lower by 40% before being acquired with a 182% premium. INHX traded higher after the VRUS purchase because investors thought it would also be acquired, because of its hepatitis C candidate. ACHN is following the same trend, from November 12 till January 13 the stock more than doubled, but has since retraced.

  At $10 I think ACHN is a buy, it does have a good HCV candidate, and I believe that big pharma will bid to acquire ACHN in the near future. However, the risk in ACHN is if the company's not acquired, then it could have significant loss over the next year. But in a competitive biotechnology industry I believe the reward is worth the risk, and that a large pharma company will take the chance and purchase ACHN in an attempt to stay competitive and capitalize on the trend of investors being bullish on HCV treating drugs.

Best Small Cap Companies To Own For 2014: FuelCell Energy Inc.(FCEL)

FuelCell Energy, Inc., together with its subsidiaries, engages in the development, manufacturing, and sale of high temperature fuel cells for clean electric power generation primarily in South Korea, the United States, Germany, Canada, and Japan. The company offers proprietary carbonate Direct FuelCell Power Plants that electrochemically produce electricity from hydrocarbon fuels, such as natural gas and biogas. Its fuel cells operate on a range of hydrocarbon fuels, including natural gas, renewable biogas, propane, methanol, coal gas, and coal mine methane. The company also develops carbonate fuel cells, planar solid oxide fuel cell technology, and other fuel cell technologies. It provides its products to universities; manufacturers; mission critical institutions, such as correction facilities and government installations; hotels; and natural gas letdown stations, as well as to customers who use renewable biogas for fuel, including municipal water treatment facilities, br eweries, and food processors. The company was founded in 1969 and is headquartered in Danbury, Connecticut.

Advisors' Opinion:

• [By Roberto Pedone]

   Fuelcell Energy (FCEL) designs, manufactures, sells, installs and services ultra-clean, highly efficient stationary fuel cell power plants for distributed baseload power generation. This stock is trading up 7.2% to $1.01 in recent trading.

  Today’s Range: $0.94-$1.01

  52-Week Range: $0.83-$1.95

  Volume: 1.27 million

  Three-Month Average Volume: 1.04 million

  From a technical perspective, FCEL is ripping higher here right above its 50-day moving average of 92 cents per share with above-average volume. This move is quickly pushing shares of FCEL within range of triggering a near-term breakout trade. That trade will hit if FCEL manages to take out its 200-day moving average at $1.05 and then once it takes out more overhead resistance at $1.06 with high volume.

  Traders should now look for long-biased trades in FCEL as long as it’s trending above its 50-day at 92 cents per share, and then once it sustains a move or close above those breakout levels with volume that hits near or above 1.04 million shares. If that breakout hits soon, then FCEL will set up to re-test or possibly take out its next major overhead resistance level at $1.18. Any high-volume move above $1.18 will then put $1.39 into range for shares of FCEL.

• [By SmallCap Investor]

  The developer of stationary fuel cells used by commercial and government customers might be headed for a rebound from a pullback that began this spring - which has left the stock down 39 percent year-to-date.

Top 5 Cheap Stocks To Buy For 2014: KongZhong Corporation(KONG)

KongZhong Corporation, together with its subsidiaries, provides wireless interactive entertainment, media, and community services to mobile phone users in the People's Republic of China. It also involves in the development, distribution, and marketing of consumer wireless value-added services, including wireless application protocol, multimedia messaging services, short messaging services, interactive voice response services, and color ring back tones. In addition, it offers interactive entertainment services, such as mobile games, pictures, karaoke, electronic books, mobile phone personalization features, entertainment news, chat, and message boards; and through Kong.net offer news, community services, games, and other interactive media and entertainment services; and sells advertising space in the form of text-link, banner, and button advertisements. Further, the company develops and publishes mobile games, including downloadable mobile games and online mobile games cons isting of action, role-playing, and leisure games. As of December 31, 2009, it had a library of approximately 300 internally developed mobile games. Additionally, it develops online games; and provides consulting and technology services, as well as media and net book services. The company was formerly known as Communication Over The Air Inc. and changed its name to KongZhong Corporation in March 2004. KongZhong Corporation was founded in 2002 and is headquartered in Beijing, the People?s Republic of China

Advisors' Opinion:

• [By Wyatt Research Staff]

  As a Chinese ADR, KONG is the leading provider of 2.5G wireless interactive entertainment, media and community services in terms of revenue to customers of company China Mobile. Institutions snatched up shares at an alarming rate with an increase of 26.7% in institutional ownership over the past three months.

  A consensus of analysts expect earnings to increase by 16.9% in 2011 and 19.6% in 2012. Company earnings are estimated to increase by 62.1% this year.

Best Small Cap Companies To Own For 2014: ATA Inc.(ATAI)

ATA Inc., through its subsidiaries, provides computer-based testing services in the People?s Republic of China. It offers services for the creation and delivery of computer-based tests utilizing its test delivery platform, proprietary testing technologies, and testing services; and provides logistical support services relating to test administration. The company?s computer-based testing services are used for professional licensure and certification tests in various industries, including information technology (IT) services, banking, securities, teaching, and insurance. Its e-testing platform integrates various aspects of the test delivery process for computer-based tests ranging from test form compilation to test scoring, and results analysis. ATA also provides career-oriented educational services, such as single course programs, degree major course programs, and pre-occupational training programs focusing on preparing students to pass IT and other vocational certification tests; test preparation and training programs and services to test candidates preparing to take professional certification tests in securities, futures, banking, insurance and teaching industries; online test preparation and training platform for the securities and banking industries; and test preparation software for the teaching industry. In addition, the company offers HR select employee assessment solution, an online system that utilizes its proprietary software and an inventory of test titles to help employers improve the efficiency and accuracy of their employee recruitment process. As of March 31, 2010, it had contractual relationships with 1,988 ATA authorized test centers. The company serves Chinese governmental agencies, professional associations, IT vendors, and Chinese educational institutions, as well as individual test preparation services. ATA Inc. was founded in 1999 and is based in Beijing, the People?s Republic of China.

Advisors' Opinion:

• [By Wyatt Research Staff]

  The Chinese-based educator spiked higher recently after it exceeded analysts' expectations. Revenue and adjusted earnings soared 78% and 269%, respectively. Its long-term annual growth rate is 15%.

  Analysts at Zacks Investment Research upgraded shares from "neutral" to "outperform". 

Best Small Cap Companies To Own For 2014: InterDigital Inc.(IDCC)

Interdigital, Inc. engages in the design and development of digital wireless technology solutions. The company offers technology solutions for use in digital cellular and wireless products and networks, including 2G, 3G, 4G, and IEEE 802-related products and networks. It holds patents related to the fundamental technologies that enable wireless communications. The company licenses its patents to equipment producers that manufacture, use, and sell digital cellular and IEEE 802-related products; and licenses or sells mobile broadband modem solutions, including modem IP, know-how, and reference platforms to mobile device manufacturers, semiconductor companies, and other equipment producers that manufacture, use, and sell digital cellular products. InterDigital?s solutions are incorporated in various products comprising mobile devices, such as cellular phones, tablets, notebook computers, and wireless personal digital assistants; wireless infrastructure equipment, such as base stations; and components, dongles, and modules for wireless devices. The company was founded in 1972 and is headquartered in King of Prussia, Pennsylvania.

Advisors' Opinion:

• [By SmallCap Investor]

  The wireless technology company said it's exploring its options, including a possible sale, following last month's successful auction of Nortel Networks intellectual property which brought in $4.5 billion. IDCC owns about 1,300 patents related to mobile phone technology.

Best Small Cap Companies To Own For 2014: Panera Bread Company(PNRA)

Panera Bread Company, together with its subsidiaries, owns, operates, and franchises retail bakery-cafes in the United States and Canada. Its bakery-cafes offer fresh baked goods, sandwiches, soups, salads, custom roasted coffees, and other complementary products, as well as provide catering services. The company also manufactures and supplies dough and other products to company-owned and franchise-operated bakery-cafes. As of March 29, 2011, it owned and franchised 1,467 bakery-cafes under the Panera Bread, Saint Louis Bread Co., and Paradise Bakery & Cafe names. The company was founded in 1981 and is based in St. Louis, Missouri.

Advisors' Opinion:

• [By Roberto Pedone]

  One casual dining player that insiders are active in here is Panera Bread (PNRA), which is a national bakery-cafe concept with 1,652 company-owned and franchise-operated bakery-cafe locations in 44 states, the District of Columbia and Ontario, Canada. Insiders are buying this stock into modest strength, since shares are up 5.2% so far in 2013.

  Panera Bread has a market cap of $4.8 billion and an enterprise value of $4.5 billion. This stock trades at a reasonable valuation, with a trailing price-to-earnings of 26.28 and a forward price-to-earnings of 21.32. Its estimated growth rate for this year is 15.8%, and for next year it's pegged at 15.1%. This is a cash-rich company, since the total cash position on its balance sheet is $341.06 million and its total debt is zero.

  The CFO just bought 1,500 shares, or about $252,000 worth of stock, at $168.58 per share.

  From a technical perspective, PNRA is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock recently gapped down big from $187.50 to its low of $165.55 a share with heavy downside volume. That move has now pushed shares of PNRA into oversold territory, since its current relative strength index reading is 25.59. Oversold can always get more oversold, but it's also an area where a stock can experience a powerful rebound higher from.

  If you're bullish on PNRA, then look for long-biased trades as long as this stock is trending above some key near-term support at $165.55, and then once it breaks out above some near-term overhead resistance levels at its 200-day of $171.33 a share to more resistance at $172.50 a share with high volume. Look for a sustained move or close above those levels with volume that hits near or above its three-month average volume of 439,019 shares. If that breakout triggers soon, then PNRA will set up to re-fill some of its previous gap down zone that started at $187.50 a share. Some possible upside targets if PNRA gets into that gap with volume are $175 to $180 a share.

• [By Fabian]  

  Most of you have probably eaten at one of these franchise bakery-cafes. If not I highly recommend it, as for the company itself they are exceptional. Profit soared 50% in the first quarter, operating margins rose several percentage points, and Panera is sitting on $300+ million of cash. Right now it’s at a 30% discount to its peer averages and the stock is very cheap when valued against future earnings. Strong buy expect it to rise to $105.