Consumer small-caps hitching a ride

• Ian Wyatt
• On 5:20 pm EDT, Friday October 23, 2009

You may be familiar with the explorer William Lewis Herndon. In 1851, he departed under orders from the Secretary of the Navy to explore the Valley of the Amazon. The four thousand mile adventure stretched from the Peruvian Andes to the Pacific Ocean on the Brazilian Coast. Lewis' mission? Seek out opportunities for trade and commerce. 

Today we heard online retailer Amazon's (Nasdaq:AMZN) results. The aptly named company crushed analyst EPS estimates which had called for $0.33 per share. Amazon beat by 36%, delivering $0.45 a share on $5.04 billion in revenue. What's more, the company raised Q4 guidance. Shares are surging 25%.

Talk about exploring opportunities for trade and commerce. It would have been nearly impossible for the average citizen in 1841 to invest in the opportunities Herndon found in the South American Jungle. But there are plenty of ways for investors to benefit from the trends in e-commerce. And small-caps are the way to do it.

Small-cap companies are overlooked and underappreciated by many investors because it's not economical for analysts to follow them. Until the companies start to break-out, and then they are all the rage. Find them when they are taking-off, and you can ride them for handsome gains. 

Earlier in the week I mentioned Diedrich Coffee (Nasdaq:DDRX) and Green Mountain Coffee Roasters (Nasdaq:GMCR). Diedrich is hitching a ride on the success of Green Mountain's K-Cup coffee packs. But both of these companies are hitching a ride on the success of online retailers like Amazon. You see, online retailers have scalability on their side, something other distribution channels don't have. Online retailers can reach to the far corners of the United States, or abroad. They can reach the jungle.

The e-commerce sales channel is making it possible for small-cap companies to expand their sales by multiples that would otherwise be unheard of. Green Mountain Coffee Roasters is up over 300% this year. Another premium coffee roaster, Peet's Coffee (Nasdaq:PEET), is up 35%. You can get their grounds on Amazon too, but not in a K-Cup. Be on the lookout. If Peet's strikes a partnership with Green Mountain Coffee Roasters to package their grounds in K-Cups, jump all over Peet's stock.

This opportunity for small-caps to rise with the large-caps isn't just possible in consumer goods like coffee. On Wednesday, the small-cap company, Drugstore.com (Nasdaq:DSCM) reported 10% sales growth. Since Wednesday's open, the stock is up over 8%, despite a selloff in the broader market. What's more, Drugstore.com stock is up 100% this year. 

Drugstore.com said its beauty.com business expanded by 19%. Guess who else just announced plans to sell beauty products online? Walmart (NYSE:WMT - News).  And CVS Caremark (NYSE:CVS - News) is expanding its online pharmacy presence. CVS will report next week. If we see good results from their online business, which I think we will, it will be time to search out the best companies that stand to benefit from increasing online sales.

In a world where commerce and trade is quite literally at the consumer's fingertips, the benefits of e-commerce are clear. Not only can we buy the products from the companies we like, in many cases we can buy a part of the company we like. Buy a small-cap that is benefiting from an e-commerce trend and enjoy the ride.

Buzz up!