Two Small-Cap Stocks to Trade Considerably Higher in February

Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

There is something exciting about a small cap stock. Perhaps it’s the unknown, or the potential for large gains, but either way investors are naturally attracted to the prospects of what a small cap stock has to offer. In this article I am looking at two stocks in particular, two of which have the likelihood to trade considerably higher both in February and long-term.

A Small Unheard of Company that You’ll Know Soon

Back on October 30, I spoke with the CEO of XPO Logistics (NYSE: XPO), Bradley Jacobs, after his third acquisition, Turbo Logistics, since his tenure began. In 2012, the $300 million company acquired $250 million in revenue, expanded its freight, and entered into a number of new segments. Jacobs, who has built four multi-billion dollar companies throughout his career and has $300 million at his disposal in cash, has continued to make bigger and better acquisitions with each purchase and is poised to report revenue of $500 million in 2013. However, this is assuming that no additional acquisition will occur, which is simply not the case.

In my newly released McGraw-Hill book, I talk in detail about unmeasured fundamentals and their psychological effect on a stock. XPO Logistics is a perfect example of an unmeasured fundamental metric, which is executive impact. So far, Jacobs has stayed true to all of his guidance and has been very methodical by nature. Therefore, when Jacobs said to me back on October 30, “we should close another acquisition sometime in the next four months” investors should take it to heart.

The stock has typically traded higher by 15-20% following acquisitions, and with earnings scheduled for February 27, I’d watch and anticipate a major move in the coming week, maybe sooner. The big upside comes following the acquisition. Up until recently, XPO Logistics has flown somewhat under-the-radar. Yet this is a company in the transportation sector with growth that is second-to-none. And if the current trend continues, then this new acquisition should be larger than the company’s previous acquisitions, as they continue to grow in size.

After the company completes its next acquisition, XPO could have revenue of more than $650 million with a market cap of $300 million. This leads me to my final point, if the company can reach $650 million in revenue with a new acquisition, it would trade with a price/sales of 0.45 (based on current valuation). Have you ever seen a company with 200% sales growth trade with a price/sales of 0.50? The answer is no, and for this reason, and Jacobs’ extensive background at creating billion dollar companies, XPO is a stock-to-watch in February and is also my investment-of-the-decade as a can’t miss stock that will be worth billions in market capitalization.  

Developmental Biotech to Rally in Anticipation of FDA Meeting

For those of you who follow biotechnology, you know that stocks often rally prior to an FDA meeting if the outlook is positive. In the case of Sarepta Therapeutics (NASDAQ: SRPT), the stock saw gains for the ages back in October 2012 after data for its drug  Eteplirsen for Duchenne Muscular Dystrophy (DMD) was released. This is a flagship drug with an Orphan status that has revenue potential of $750 million and that could receive very encouraging news later this month from the FDA.

 The company will meet with the FDA to discuss an accelerated approval, and most analysts are optimistic that the drug will hit shelves soon. The stock is priced at $27.80, down from its $45.00 October high, and I anticipate a move higher to the mid-high $30s by the end of February. Right now, the stock has price targets from $54 to $83 based on price/peak sales between 2 and 3. However, I tend to believe that if approved and if commercially successful that Sarepta will enjoy the same value/revenue metrics that are seen in stocks such as Alexion Pharmaceuticals, Regeneron Pharmaceuticals, and BioMarin Pharmaceuticals at or around 10x sales. Therefore, if Sarepta’s drug is approved, reaches annual sales of $500 million within three years, and finds a partnership for global development, then prices near $200 are not out of the question, if all pieces fall into place.

Conclusion

In my opinion, both of these two stocks are greatly undervalued. Sarepta has one of the best technologies in biotechnology and if the FDA meeting goes well then gains won’t be far behind, neither will large pharma. XPO Logistics is the best kept secret on Wall Street, although soon it will be realized. I urge investors to take time and research both stocks to see if either fits into your portfolio. At that point you can make an educated decision, and will most likely see the clear upside in shares of these two stocks. 


BrianNichols owns shares of XPO Logistics and Sarepta Therapeutics. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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