The Smallcap World in 2016 – Themes, Industries, and Stock Picks

Alex Cutulenco | December 18, 2015: As a continuation to our SmallCapPower “2015 Year in Review” series, we follow up with Part 2: The World in 2016. The purpose of this article is to provide some insights into the industries that may perform well in 2016. Additionally, we will provide some stock picks for our valued readers. Enjoy!

 

 

THEME #1:

Security … cyber security

In the coming world, war will not solely be fought with bombs and bullets. Instead, war will finds its place electronically, as losing private sensitive data has become more of a scare to global powerhouses. With global tensions rising within the Middle East, Russia, and other parts of Europe (France, Ukraine), cyber security will undoubtedly be a necessity.

The Financial Industry will be the first target for cyber attacks, as this would cause everyone in the country to panic. Stock markets would become shaky, and national funding may be compromised. Due to this scare, large financial institutions (in Canada and the US) will seek to better equip themselves with cyber security providers.

Amongst the publicly listed cyber security companies, we feel that the following names will outperform in 2016:

KEYW Holding Corp. (NASDAQ: KEYW)

Price: $8.46 | Market Cap: $338 million

The KEYW Holding Corporation (KEYW) is a provider of cybersecurity, cyber superiority and geospatial intelligence solutions to the United States Government defense, intelligence, national security agencies and commercial enterprises. The Company’s Commercial Cyber Solutions segment provides analytic software packages, and related maintenance and services.

  • LTM Revenues: $382 million
  • EV/Revenue: 1.3x
  • P/B: 1.0x

Guidance Software Inc. (NASDAQ: GUID)

Price: $7.18 | Market Cap: $220 million

Guidance Software, Inc. is a provider of endpoint investigation solutions for cybersecurity analytics, security incident response, e-discovery and forensic analysis. The Company’s EnCase platform provides an investigative infrastructure that enables its customers to search, collect and analyze electronically stored information in order to address suspicious network activity, respond to security breaches and to defend their organizations’ data assets.

  • LTM Revenues: $135 million
  • EV/Revenue: 1.4x
  • P/B: 12.5x

VASCO Data Security International Inc. (NASDAQ: VDSI)

Price: $17.16 | Market Cap: $683 million

VASCO Data Security International is an IT security company. The Company designs, develops and markets security solutions that secure and manage access to digital assets and protect transactions. Its products enable secure financial transactions over private enterprise networks and public networks, such as the Internet.

  • LTM Revenues: $253 million
  • EV/Revenue: 2.0x
  • P/B: 2.8x

 

THEME #2:

Apart from Security, the Tech Industry is forecasted to Outperform

Within the massive realm of technology, Big Data Analytics and Software as a Service (SaaS) companies are forecasted to outperform. Global SaaS software revenues are forecasted to reach $106B in 2016, increasing 21% over projected 2015 spending levels. By 2018, 59% of the total cloud workloads will be Software-as-a-Service (SaaS) workloads, up from 41% in 2013.

Figure 1: SaaS Software will equal $106 Billion in 2016; Forrester Estimates

Figure 2: SaaS most Highly Deployed Global Cloud Service by 2018; Cisco Estimates

Due to this “blue sky” opportunity, we believe the following stocks will capture a share of this growing SaaS market:

Halogen Software Inc. (TSX: HGN)

Price: $7.37 | Market Cap: $162 million

Halogen Software Inc. (Halogen) is a company, which provides a cloud-based talent management solutions software. Its customers use Halogen’s suite of integrated Talent Management (TM) solutions to retain talent, align goals, assess and develop employees, cultivate leaders, provide feedback and recognition, employee engagement, communication and manager-employee relationships, support a pay-for-performance culture and build talent bench strength through planning.

  • LTM Revenues: $64 million
  • EV/Revenue: 1.2x
  • P/B: 10.6x

Silver Spring Networks Inc. (NYSE: SSNI)

Price: $14.81 | Market Cap: $746 million

Silver Spring Networks, Inc. is engaged in creating, building and deploying large scale networks and solutions enabling the Internet of things for critical infrastructure. The Company provides a networking platform and solutions. Its networking platform enables customers to communicate with devices connected to the power grid.

  • LTM Revenues: $368 million
  • EV/Revenue: 1.7x
  • P/B: -7.5x

Model N Inc. (NYSE: MODN)

Price: $11.05 | Market Cap: $295 million

Model N Inc. provides revenue management solutions for the life science and technology industries. The Company’s solutions enable its customers to maximize revenue and reduce revenue compliance risk by transforming their revenue life cycle from a series of tactical, disjointed operations into a strategic, end-to-end process. Its customers use its application suites to manage functions, such as pricing, contracting, incentives, and rebates.

  • LTM Revenues: $94 million
  • EV/Revenue: 2.2x
  • P/B: 3.5x

 

THEME #3:

Another industry which should see a boost in 2016 is Clean Tech

The COP21 climate meeting in Paris has ended, and representatives from 196 nations made a historic pact. The international agreement hopes to fix and limit global warming to below 2°C by 2100, as compared to what it was before the industrial era.

A needed assumption for this target would be the reduction of greenhouse gas emissions by between 40% and 70% by 2050, and reaching a zero level in 2100, according to the UN Intergovernmental Panel on Climate Change (IPCC).

At the forefront of this announced change, will be technologies specifically designed to limit carbon emissions. Another avenue for potential growth is via technologies which make renewable energy an economically advantageous source of energy production, as a comparison to fossil fuel based energy gather.

To round up this market, we believe the following clean tech names will be prosperous in 2016:

CO2 Solutions Inc. (TSXV: CST)

Price: $0.21 | Market Cap: $27 million

CO2 Solution Inc. is a company involved in the capture and management of carbon dioxide. The Company is focused on commercializing an enzyme-based enabling technology for CO2 capture from fossil fuel-power plants and other emitters of CO2. Its applications include carbon capture and utilization, such as enhanced oil recovery, pulp and paper, water treatment, greenhouses and beverage carbonation, and carbon capture and sequestration (CCS).

  • LTM Revenues: $0
  • EV/Revenue: N/A
  • P/B: 17.7x

Advanced Emissions Solutions Inc. (OTC: ADES)

Price: $5.80 | Market Cap: $126 million

Advanced Emissions Solutions, Inc. is a holding company. The Company, through its subsidiaries, provides emissions solutions in power generation and other industries. It is focused on clean coal technology and the associated specialty chemicals, serving the coal-fueled power plant industry. ACES is focused on supporting and improving its existing products, and identifying, developing and commercializing solutions to advance cleaner energy.

  • LTM Revenues: $269 million
  • EV/Revenue: 0.5x
  • P/B: -7.0x

Abengoa Yield PLC (NASDAQ: ABY)

Price: $17.03 | Market Cap: $1,707 million

Abengoa applies innovative technology solutions for sustainability in the energy and environment sectors, generating electricity from renewable resources, converting biomass into biofuels and producing drinking water from sea water.

  • LTM Revenues: $669 million
  • EV/Revenue: 13.2x
  • P/B: 0.8x

 

THEME #4:

Lastly, Financial Technology (ie. FinTech) will see gains in 2016

FinTech was a very hot topic leading into the end of 2015. Here at SmallCapPower, we have already written about this area, and we chose to reverberate our stock picks for the hot sector.

Our FinTech stock picks for 2016:

Versapay Corp. (TSXV: VPY)

Price: $0.87 | Market Cap: $23 million

VersaPay is financial technology company that has developed a proprietary SaaS solution, VersaPay ARC, focusing on accounts receivable management designed for mid-sized businesses. The group also offers business and consumer customers a cloud-based credit card and electronic funds transfer service with PayPort and similar services to third-party technology partners via the VersaPay Gateway.

  • LTM Revenues: $4.3
  • EV/Revenue: 4.6x
  • P/B: 7.2x

IOU Financial Inc. (TSXV: IOU)

Price: $0.47 | Market Cap: $29 million

IOU Financial Inc (IOU) operates an Internet-based lending platform in the United States for owner-operated businesses with daily sales, such as medical and dental practices, grocery and retail stores, restaurants and hotels, franchisees and e-commerce companies, through its subsidiary, IOU Central Inc. The Company allows these businesses to apply for six, nine or twelve month loans, that are repaid daily over the term of the loan directly out of the business’ bank account, and that are personally guaranteed by their owner(s).

  • LTM Revenues: $8.8 million
  • EV/Revenue: 4.1x
  • P/B: 2.8x

TIO Networks Corp (TSXV: TNC)

Price: $1.36 | Market Cap: $81 million

TIO Networks is the leading multi-channel expedited bill payment processor serving the largest telecom, wireless, cable and utility bill issuers in North America. TIO integrates its Transaction Processing System to the accounting back-office of the biller partners (such as AT&T for telephone/WiFi bill payments), which allows billers to post payments accurately and quickly to the appropriate customer accounts. Once integrated with a biller, TIO is able to offer to the billers’ customers the ability to pay their accounts through multiple access points, including self-service kiosks, POS/clerk-assisted locations, smartphone applications and more.

  • LTM Revenues: $51 million
  • EV/Revenue: 1.2x
  • P/B: 11.4x

 

Alex can be reach at: alex@gravitasfinancial.com

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