Making sense of disparate data streams is a necessary skill for investors; stocks can shift in response to a wide range of causes, or sometimes none at all, and putting together a profitable portfolio requires understanding the factors that influence those stock movements. The forest of available data makes investing in the stock markets an intimidating endeavor.
The Smart Score makes the investor’s job easier. This unique tool sorts the raw information according to 6 separate factors that are each known to predict future growth. Taken together, the factors are averaged and used to create a single score that indicates the likely direction the stock will move. The Smart Score is given on a scale of 1 to 10, with the higher scores indicating a higher likelihood that the stock will perform better than the overall markets in the coming months.
A ‘perfect 10’ Smart Score is a rare gem – fewer than 200 out of more than 10,000 stocks covered hold this high rating. But that high score is a clear sign for investors that here is a stock deserving a closer look. Here we give that closer look to three small-cap stocks, each with at least a 60% upside potential – and that 'perfect 10' Smart Score.
Intevac (IVAC)
The first company on our ‘perfect 10’ list today is Intevac (NASDAQ:IVAC), a manufacturer of specializing in two essential high-tech products: magnetic media processing systems and high-sensitivity digital-optical systems. Both product sets are based on thin film technology. Intevac is a major world supplier of magnetic media, with a 60% market share in the industry’s production systems. The company is the sole supplier of digital imaging systems for the US military’s night vision equipment.
Intevac saw revenue and earnings dip sharply in the first quarter, during the coronavirus crisis and associated economic downturn, but have quickly turned positive in the second quarter. Revenues gained 53% sequentially to reach $28.8 million, for a 29% year-over-year gain, while EPS moved from a 5-cent loss to a 6-cent gain. The EPS number beat the forecasts by 135%.
Chiming in from Wall Street is 5-star analyst Gus Richard of Northland Securities. Richard was impressed enough with the stock to initiate coverage of IVAC shares with an Outperform (i.e. Buy) rating and $11 price target. This figure indicates a potential upside of 80% for the coming year.
Backing his stance, Richard writes, “The night-vision business is transitioning from avionics applications to ground troops driving scale and growth in this business […] IVAC revenues have been range-bound for the last 3 years delivering roughly breakeven annual results. We believe that the combination of the IVAS night-vision program, an HDD technology transition, and new product targeting new markets, IVAC’s revenue is set to grow over the next several years driving earnings acceleration...”
Overall, Intevac has a Moderate Buy rating from the analyst consensus, based on 3 reviews which include 2 Buys and 1 Hold. The stock is selling for $6.26 and has an average price target of $8.83, suggesting a one-year upside potential of 41%. (See IVAC stock analysis)
K12, Inc. (LRN)
Next up, we move to the education sector, where K12 (NYSE:LRN) is a for-profit company offering innovative curricula to school districts, individual schools, and homeschooling parents, as an alternative to older modes of instruction. K12’s products are popular among homeschoolers, and during the coronavirus crisis, with schools shut down, the company’s familiarity with remote learning gave it an advantage when marketing to traditional school systems.
During 1H20, the height of the coronavirus pandemic, K12 stuck to its historic pattern of revenue and earnings results, with Q1 and Q2 both showing sequential declines. Q2 EPS, however, beat the forecasts by an impressively wide margin of 300%, coming in at 12 cents against the 3 cents predicted. Revenues in Q2 grew 4.5% sequentially and came in at $268.9 million. These results reflected the relevance of the company’s business model and products at a time when schools are shifting to remote learning, and when homeschooling is gaining traction.
LRN shares are up 63% year-to-date, in another indication that the company is currently navigating in a favorable environment.
Alexander Paris, of Barrington Research, believes that K12 has a clear path forward over the next 12 months. He writes, “[K12] is preparing for increased student enrollment in the fall… we could see some downward pressure on revenue per enrollment, due to the ongoing COVID-19 impact on state budgets, [however] strong expected volume gains will more than offset any potential downward pressure from revenue per enrollment in FY/21… the company is positioned to deliver double-digit growth in both revenue and adjusted operating income in the coming fiscal year.”
In line with these optimistic comments, Paris sets a $60 price target, implying room for 75% share appreciation from current levels.
LRN gets a Strong Buy from the analyst consensus, and that rating is unanimous, based on 3 recent positive reviews. Shares are selling for $33.39; the average price target of $55 suggests there is room for a 65% upside in the year ahead. (See LRN stock analysis)
Ultra Clean Holdings (UCTT)
For the last stock on our list, we move to the semiconductor industry. These chips are the heart of the modern digital age – and Ultra Clean Holdings (NASDAQ:UCTT) is essential to the chip makers. Ultra Clean is a high-tech manufacturing company that designs, engineers, and builds the critical subsystems required to produce semiconductor chips, as well as other high-end digital necessities such as liquid crystal displays.
The value of UCTT’s position in the manufacturing chain can be seen by the earnings patter of the past several quarters. EPS gained steadily for the last 4 consecutive quarters, beating the forecasts in each one. This pattern held even through the height of the coronavirus crisis, with the 69 cents EPS in the most recent quarter, 2Q20, coming in 68% above the estimates. Revenues showed smaller sequential gains, but still gained over the past year; the Q2 top line stood at $344 million.
5-star Needham analyst Quinn Bolton is impressed by Ultra Clean’s ability to beat earnings forecasts and show steep growth during the coronavirus pandemic. He attributes this success to the urgent need for semiconductor chips – and therefore, for reliable manufacturing equipment.
“As global wafer fab equipment (WFE) grows and semiconductor manufacturing sector consolidates, there is a pressing need for original equipment manufacturers (OEMs) to consolidate the fragmented subsystems supply chain to better cope with the cyclical growth demand of WFE. Ultra Clean… should see an increasing share of content in WFE as WFE grows… UCTT is one of our favorite derivative names.”
Bolton’s review comes with a Buy rating and a $35 price target that implies an 81% upside potential over the next 12 months.
All in all, Ultra Clean has a Moderate Buy analyst consensus rating, based on 2 Buys and 1 Hold. The stock’s average price target of $33.67 suggests it has a 47% upside potential from the $22.77 current trading price. (See UCTT stock analysis)
To find more ideas for stocks trading at attractive valuations, visit Investing Insights.