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Hunting for the Best Small Cap Tech Stocks
Markets are off to a good start in 2017. March is proving to be perfect for backcountry hunting. I have been out on a quest for a while now, in search of the best small cap tech stocks. The good news is that I’ve scored some bullseyes. These small cap tech stocks could make for a lavish meal that an investor could feast on for years to come.
It’s no secret that the charging bull has made its way to Wall Street. The Fed may be raising rates to pull its reins, but there’s no stopping it.
Across the board, eyes are now fixated on the tech sector. It’s not only because tech is being touted as the future of all businesses, but also because this sector is creating new millionaires (and even billionaires) overnight.
All it takes now is one genius idea of a startup to stick and you’ve hit a jackpot. Tech investors are likewise making quick fortunes.
I say, it is quite a bonanza!
You must have noticed that this craze is making Wall Street analysts go bananas. They are desperately drawing lines and extrapolating trends to find the next move in stock prices. Somewhere there, a streak of luck kicks in and they strike it rich.
But in my investing handbook, technical analysis is not for investors. It is for traders.
And these traders have ants in their pants. When the tide turns, they start acting like lemmings. All it takes is one instance of bad news, and they mindlessly rush out to run themselves off the cliff.
The “Triple-E Test”
The best way to invest is, of course, the Warren Buffett way. As a contrarian investor, this self-made billionaire buys when the market sells on temporary bad news.
But he doesn’t buy just about anything that’s cheap. Instead, he buys value.
In order to find these valuable investments, I have created a screener test that I like to call the “Triple E” test.
If the company checks all the “Es,” I want to add it to my watchlist.
So what are these three Es, you ask? They are the three fundamental items on a company’s financial statement. Each one must meet a certain criterion to pass the test.
The first is “Equity.” It defines your ownership in the company after all of the debt is paid off. So the higher the return on your ownership, the more profitable your investment is. We’ll be seeking returns on equity in excess of 10%.
The second E is “Earnings,” and the criterion is consistency. For a company that has consistently made money over the years, it is safe to assume that it is a durable investment that can last you another five to 10 years.
The final E is “Excess Cash.” It is your insurance policy against misfortune. Just imagine if your company gets into trouble and creditors come knocking at the doors. The cash reserves will help the company stay afloat through a rough tide.
But before we run my list of best small cap stocks through the test, let’s first address the real question.
Should You Invest in Small Cap Stocks?
I’ll respond to that with a rhetorical question.
Why not?
It’s no secret that small cap value stocks have historically done better than large cap stocks.
Just look at the chart below. It shows the SPDR S&P 600 Small Cap Growth ETF (NYSEARCA:SLYG) outperforming the S&P 500 Large Cap Index (SPX) by a huge margin.
Chart courtesy of StockCharts.com
But here’s a word of caution.
Small cap stocks are shunned for a reason. They are volatile, less liquid, and don’t receive much analyst coverage.
This can be problem if you want to “trade” them. But if you’re investing for the long term, a good value pick can eventually return stupendous profits.
Bless our lucky stars, for there are still opportunities for investors to make money. It’s just about seeking the right stocks with the right fundamentals.
Best Small Cap Tech Stocks to Watch Right Now
Here are my top picks for small cap stocks. We’ll be running my Triple E test on each one to gauge their value.
| Market Cap | Five-Year Return | |
| Ambarella (AMBA) Stock | $1.81 Billion | 816% |
| Celestica (CLS) Stock | $2.12 Billion | 47% |
| Value Line (VALU) Stock | $169.26 Million | 73% |
And here’s a bonus for you!
For its small market capitalization, the last one of these is my pick for the best “micro” cap tech stock.
Ambarella (AMBA) Stock
This small cap tech stock has been on my radar for over two years now. I’ve seen Ambarella Inc (NASDAQ:AMBA) go through many ups and some downs.
If you remember, this company was unfairly beaten last year for being a major supplier to GoPro Inc (NASDAQ:GPRO)—the action camera seller whose colossal collapse from a short-lived stardom is no secret.
But what the market failed to see was how Ambarella pulled itself together and continued to move forward after GoPro dropped out of the race. Through this period, Ambarella has consistently made money and silenced the naysayers.
Notice AMBA stock’s recovery after the GoPro debacle. That’s when the lemmings ran off but value-seeking investors stayed.
Chart courtesy of StockCharts.com
Ambarella Inc (NASDAQ:AMBA) makes camera chips for drones, action cameras, surveillance cameras, and automotive cams.
Lucky for AMBA stock, all four of these segments are booming.
The drone industry has officially taken off. From professional film makers to grocery retailers, drones are seeing a huge demand. Likewise, action cameras are gaining popularity as social media sharing becomes rampant.
Surveillance cameras are perpetually and globally in demand because of security concerns. And finally, automotive cameras are becoming an altogether new industry as self-driving technology makes its way to the mainstream.
Now, Ambarella is one of the top players in the industry and is celebrated for its quality. In fact, I can also vouch for it since I’ve personally used products that carried its chips.
Finally, if you put it to the Triple E test, it checks all three Es.
It is currently returning over 14% on equity. Earnings are consistent. In fact they’re growing steadily, with last year-over-year quarterly earnings growth of over 260%!
And the best part: it has a clean balance sheet with no debt and cash reserves of over $400.0 million.
| Criterion | Test Result | |
| Equity | ROE > 10% | ✓ |
| Earnings | Consistency | ✓ |
| Excess Cash | Debt paying ability | ✓ |
I wouldn’t think twice to call it one of the best small cap tech stocks in 2017.
Celectica (CLS) Stock
Many remain unaware of the fact that this Canadian company was spun off from IBM Canada in the 90s. Today, Celestica Inc (NYSE:CLS) is one of the top electronics manufacturing services (EMS) providers in the world.
Now, what the heck is that?
Let me explain. When your kitchen sink gets clogged, do you call the manufacturer? No! You call the plumber who fixes it for you or replaces the broken parts.
An EMS provider is like a plumber who tests, fixes, and provides product or service support to your electronics.
Celestica is one such EMS provider that delivers designing, manufacturing, inspecting, logistical, and supply chain services to its clients in nearly every big industry that you can think of—be it tech, defense and aerospace, industrial manufacturing, renewable energy, or even the healthcare sector.
Simply put; nearly every company uses electronic machines (from computers to big industrial equipment) that run the risk of going out of order. And whenever they’ll need a plumber, so to speak, Celestica will be at their service. Naturally, its repeat customers make the most money for it.
By the way, Celestica doesn’t just serve clients in Canada and the U.S., but in a total of 12 different countries around the globe.
Time to put CLS stock to my Triple E screener test!
| Criterion | Test Result | |
| Equity | ROE > 10% | ✓ |
| Earnings | Consistency | ✓ |
| Excess Cash | Debt paying ability | ✓ |
The company returns 11.7% on equity and holds enough reserves to pay off all of its debt and still be left with $300.0 million in excess cash. There have been fluctuations in earnings, but profitability has remained consistent for over two decades.
As for its stock performance, CLS stock has delivered decent returns in the last five years and is up a solid 68% this year alone.
Chart courtesy of StockCharts.com
In a nutshell, CLS stock boasts the right fundamentals to deserve a spot on my list of best small cap tech stocks for 2017.
Value Line (VALU) Stock
In my line of work, finding somebody who is unfamiliar with this company is rare. Many of us are also its clients.
For eight long decades, Value Line, Inc. (NASDAQ:VALU) has provided investors and analysts with trusted investment research.
Value Line’s investment publications cover an extensive range from stocks to mutual funds, ETFs, options, and convertible securities. It’s the go-to information source for seasoned investors and institutions.
And here’s the kicker. Buffett, too, uses ValueLine’s services.
It doesn’t take one to be a genius to see the durability of its business. Markets will likely exist in perpetuum and so will the need for quality research.
Let’s put this one to the test.
VALU stock returns an impressive 28.75% on equity, holds $21.0 million in excess cash with no debt burden to pay off, and earnings have remained consistent with periods of steady growth.
| Criterion | Test Result | |
| Equity | ROE > 10% | ✓ |
| Earnings | Consistency | ✓ |
| Excess Cash | Debt paying ability | ✓ |
What’s more; it pays a dividend too with a yield of four percent!
No wonder it’s named “VALU” stock (pun intended!).
The stock is up over 72% in five years and the recent dip may have created an opportunity for investors to move in.
Time to put this best micro tech stock on your watchlist!
Chart courtesy of StockCharts.com
Bottom Line on Best Small Cap Tech Stocks for 2017
Small cap stocks come with volatility. So does the tech sector. When you combine the two, the bet gets riskier two-fold. This is why I’d never recommend trading in this space.
The best way to make money off of this market segment is by becoming a disciplined investor.
For that, my Triple E test may come in handy.
So, look for promising value plays for the long term and don’t panic when the lemmings rush for the exit.
Finally, don’t forget to keep an eye out for these three investment opportunities as they could turn out to be the best small cap tech stocks for 2017.
Happy investing!
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