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3 Small Caps to Consider for Growth

On the tailwind of a growing U.S. economy, in which gross domestic product is projected to have hit a 2% annualized gain in the final quarter of 2019, the Russell 2000 Index rose 25.8% to $1,657.64 per share over the past year through Friday, Jan. 10. The Russell 2000 is used as a benchmark for small-cap, U.S.-listed companies, or stocks with a market capitalization of $300 million to $2 billion.


For 2020, an expected ongoing increase in consumption (the largest component of the GDP) will continue to lead the U.S. economy expansion, pushing small caps' share prices higher as their annual earnings per share, which is an essential catalyst to growth, continue to benefit.

Therefore, investors may want to consider the following small caps, which reported strong increases in their last 12-month earnings per share without non-recurring items of 25% or more.

FormFactor

The first company that meets the criteria is FormFactor Inc. (NASDAQ:FORM), a Livermore, California-based semiconductor manufacturer with a market capitalization of around $2 billion.

FormFactor has grown its trailing 12-month earnings per share without non-recurring items by 337.5%, determining a 90% increase in the share price over the past year to close at $26.4 on Friday, above the 200-, 100- and 50-day simple moving average lines.

The stock has a price-earnings ratio of 18.84 compared to the industry median of 25.03 and a price-book ratio of 3.25 versus the industry median of 1.9.

For the next five years, analysts forecast a 20% annual growth in earnings per share, which will drive the share price up. Also, as of January, three sell-side analysts out of a total of eight have a strong buy rating, four suggest a buy rating and one sell-side analyst suggests holding shares of FormFactor.

GuruFocus assigned a very high financial strength rating of 8 out of 10 and a moderate profitability rating of 4 out of 10 to the company.

FormFactor does not pay a dividend.

IRobot

The second company that meets the criteria is iRobot Corp. (NASDAQ:IRBT), a Bedford, Massachusetts-based designer, producer and seller of floor and pool cleaning robots for the consumer market worldwide, with a market capitalization of roughly $1.4 billion.

IRobot reported 33.5% growth in its trailing 12-month earnings per share without non-recurring items. Regardless, the stock lost 41% in 2019, creating a compelling entry point below the 200-, 100- and 50-day simple moving average lines at a level of $48.98 per share as of Friday.

This stock is forecasted to increase nearly 10% within a year to hit a $53.33 target. Wall Street sell-side analysts have also released eight recommendation ratings in January, of which seven range between strong buy and hold, while one has an underperform rating.

The stock has a price-earnings ratio of 15.55 versus the industry median of 19.72 and a price-book ratio of 2.22 versus the industry median of 1.68.

Moreover, sell-side analysts forecasted that iRobot will continue to grow ts earnings over the next five years at a rate of 18% per year.

GuruFocus assigned a very positive financial strength rating of 7 out of 10 and a very high profitability rating of 9 out of 10 to the company.

IRobot does not pay a dividend.

Vanda Pharmaceuticals

The third company is Vanda Pharmaceuticals Inc. (NASDAQ:VNDA), a Washington-based biopharma developer of treatments for sleep-wake disorders, schizophrenia, hematologic malignancies and cystic fibrosis. The stock has a market cap of approximately $855.3 million.

Vanda has grown its trailing 12-month earnings per share without non-recurring items by 829.2%. Surprisingly, the share price fell by 43% in the past year to below the 200-, 100- and 50-day simple moving average lines, instead of going up.

As a result, Friday's closing share price of $16.04 offers a compelling entry point, because if the stock reaches the $28.2 price target within 52 weeks, the investor will witness 76% growth in the value of their holding.

The stock has a price-earnings ratio of 7.19 compared to the industry median of 33.16 and a price-book ratio of 2.13 versus the industry median of 3.61.

For the next five years, sell-side analysts forecast that Vanda Pharmaceuticals will be able to increase its earnings per share by an average of 77% per year, which determines a high likelihood the share price reverses its trend and posts large positive returns.

Further, as of January, six sell-side analysts have issued recommendation ratings on shares of Vanda Pharmaceuticals, consisting of two buys, three strong buys and one underperform rating.

GuruFocus assigned a very positive financial strength rating of 7 out of 10 and a positive profitability rating of 6 out of 10 to the company.

Vanda Pharmaceuticals does not pay a dividend.

Disclosure: I have no positions in any securities mentioned.

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This article first appeared on GuruFocus.