Five small caps to watch

Not every company is posting losses

BY CHERYL DEVOE KIM
Globe Investor Magazine online, March 5, 2009

In spite of job losses, bankruptcy filings and red ink at companies around the world, not every CEO is dreading releasing financial results these days. Some companies are not only making money in this environment, they're growing. And for that success, investors are rewarding them richly. Here are five small-capitalization stocks that are rising above the gloom.

Mosaid Technologies Inc. (MSD-TSX)
$11.12, up 31% YTD

Earnings growth is only part of the story at Mosaid, which develops and licenses patents for semiconductor and communications technologies. A run of good news started in early February when it settled patent litigation with Micron Technology Inc. and announced a patent licensing agreement with Nokia Corp.

Then Mosaid, run by chief executive officer John Lindgren, went on to report better-than-expected results on Feb. 26, with quarterly revenue climbing 29 per cent to $18.1-million, and profit of $2.3-million versus a loss of $1.2-million a year earlier. The company forecast further growth for both revenue and profit in 2009.

BMO Nesbitt Burns Inc. analyst Brian Piccioni raised his earnings estimates for the company, which he rates "outperform," after the third-quarter announcement.

"Despite turmoil in the semiconductor markets (including some of Mosaid's licensees), Mosaid is doing well," Mr. Piccioni wrote in a report.

Valuing the company's stock is difficult, he said, because of the potential for forecasts to be "significantly" wrong in either direction, but the analyst has an $18 price target on the stock.

Bridgewater Systems Corp. (BWC-TSX)
$3.69, up 47.6% YTD

Bridgewater said last week that its 2008 revenue rose 13 per cent and it expects 2009 growth of between 18 and 31 per cent. Profit was little changed at $2.8-million.

Shares of the Ottawa developer of communications infrastructure software for wireless service providers such as Verizon Wireless and Bell Canada have been on the climb since early December, roughly doubling.

TD Newcrest analyst Scott Penner raised his 12-month price target on the stock last week to $4.50 from $4, though he said investors will want to see some proof Bridgewater can execute its 2009 plan before they build management's growth projections into what they are willing to pay.

Mr. Penner noted that although the stock is relatively cheap, trading at just 1.6 times the company's cash, its fortunes are linked to the "difficult carrier spending environment."

An added question mark surrounding this stock is what effect a bid by Crescendo Partners to replace five of the company's eight directors and then sell the company to a bigger player will have. Crescendo owned 12.7 per cent of Bridgewater as of Feb. 11. The company's annual and special meeting is set for May 26.

RuggedCom Inc. (RCM-TSX)
$19.90, up 52% YTD

RuggedCom is another company that has attracted investors' attention with earnings growth in a time of drought. The Woodbridge, Ont., company makes communications network products, including ethernet switches, routers and wireless devices, for customers such as Hydro One Inc., SNC-Lavalin Group Inc., Chevron Corp. and Lockheed Martin Corp.

The company's third-quarter profit almost tripled to $4-million, while quarterly revenue rose 53 per cent to $15.8-million. RuggedCom's consistent growth is part of what fund manager Lesley Marks of Jones Heward Investment Counsel Inc. likes about the company.

"They have been able to grow at greater than 50 per cent over the last three years, and the outlook looks fairly promising, based on the strong undercurrent of infrastructure spending that's going to occur in the U.S.," said Ms. Marks, who holds the stock in the BMO Guardian Special Equity Fund. "In an environment where there aren't a lot of growth opportunities, they will be able to grow."

Momentum Advanced
Solutions Inc. (WWW-TSX)
16 cents, up 28% YTD

With a stock price measured in pennies, it doesn't take much movement to register large returns. Shareholders of Momentum, with a market cap of just $10-million, have seen a tremendous return in the past two weeks since its chief executive officer, Sheldon Pollack, and president, Phillip DeLeon, expressed an interest in privatizing the company at 20 cents a share.

Momentum, which provides Internet services such as web hosting and online data backup, will report third-quarter results next week. It reported a 22-per-cent jump in revenue for the second quarter to $5.1-million, although profit fell to $20,994 from $74,117. Its customer list includes Air Miles, Dundee Securities Corp. and the House of Commons.

Fund manager Roger Dent controls about four million Momentum shares, or 6.25 per cent, held in the Mavrix Small Companies Fund. He's waiting to see whether Mr. Pollack and Mr. DeLeon come forward with a formal offer before deciding what to do with his shares, he said.

"There's a whole group of these Canadian companies that provide various services related to the Internet - web design, web hosting - and what we like about them as a group is that they have diversified customer bases, are providing services to the fastest-growing parts of people's businesses, the Internet side, and we like the fact that these companies throw off cash as they grow," Mr. Dent said.

Aastra Technologies Ltd. (AAH-TSX)
$15.40, up 29.5% YTD

Aastra reported last week that fourth-quarter revenue jumped 69 per cent, removing two key risks from the stock in analyst Kris Thompson's eyes: missing its quarterly targets, and showing difficulties integrating product lines acquired from Ericsson last year. In a note for National Bank Financial, Mr. Thompson wrote: "It's time to more aggressively pursue an investment in Aastra." Investors agreed - the stock climbed 47 per cent the day after it beat analysts' expectations and has continued to climb in the days since.

Aastra develops and markets both Internet protocol-based and traditional communications networking products and systems. Much of its earnings growth came from its acquisition of product lines from Ericsson, but the company said that even without the acquisition, its sales would have climbed 13 per cent.

Fourth-quarter profit was $1.5-million, including severance charges related to restructuring after the acquisition, compared with $12.3-million a year earlier.

Special to The Globe and Mail