After a two-year bull market that followed the 2008 financial crisis, small-caps have been brutalized. The Russell 2000 index, a measure of share performance for smaller companies, is down more than 14 percent since the end of April.
Investors have become more risk-averse and have sought safety in dividend-paying, large-cap stocks, U.S. Treasury bonds and even cash. The flight to safety has been torrential, especially as the debt crisis in Europe worsens.
Overall, the Russell 2000 index has dropped 6 percent this year, while the S&P 500, which holds the companies with the largest market values, is down a fraction of a percent. At the same time, the yield on the 10-year U.S. Treasury has dwindled from 3.3 percent to 2 percent.
Gold has also been a hideout for investors. The precious metal has jumped from about $1,400 an ounce at the end of 2010 to above $1,700 an ounce.
Still, many inexpensive stocks have generated huge returns for lucky stock pickers. In November, amid fears the entire eurozone region would crumble under the weight of its debt, stocks like Pacific Ethanol and Spanish Broadcasting System more than doubled.
But given the volatility in the equity market, investors must be careful in searching out small-cap stocks worth the risk, as fortunes can be lost with one bad trade. For example, American Airlines parent AMR Corp. dropped more than 87 percent last month on its bankruptcy announcement, while FiberTower and Delta Petroleum each sank 70 percent.
Some small-cap winners have doubled and, in some cases, tripled and quadrupled this year.
The following details the best-performing stocks under $5 this year on the New York Stock Exchange, Nasdaq and NYSE Amex, ranked by total return in 2011.
Company Profile: Vical develops gene-based treatments for cancer and infectious disease vaccines using DNA technology and proprietary lipids.
Vical's stock has had an up-and-down 2011, beginning the year at $2 before spiking above $5 in July after the company signed an exclusive license contract with Astrellas Pharma for the commercialization of TransVax, Vical's therapeutic vaccine designed to control cytomegalovirus reactivation in transplant recipients.
By October, shares of Vical slipped below $3 before jumping back above $4 in November after the company reported third-quarter earnings results, which included $25 million in licensing revenue from TransVax.
Share Price: $4.59 (Dec. 2) 2011 Total Return: 127 percent. Analyst Ratings: Vical has the most coverage of any stock on the list with nine analysts following the company. Six say the stock is a "buy" while the other three suggest that investors hold onto shares.
The average price target of $7.20 is about 57 percent above current levels.
TheStreet Ratings has a "hold" rating on Vical, noting that the company's "robust revenue growth, largely solid financial position with reasonable debt levels by most measures and solid stock price performance" is counterbalanced by disappointing return on equity.
Company Profile: Interphase is a telecom-equipment maker. The company provides services for LTE and WiMAX, interworking gateways, packet processing, network connectivity and security for key applications.
Interphase shares more than doubled on Feb. 11, a day after the company reported fourth-quarter financial results. The company said revenue in the quarter jumped 24 percent to $5.8 million as it swung to a quarterly profit. The stock hit a high of $7.59 in March but has been steadily pulling back since.
Share Price: $4.59 (Dec. 2) 2011 Total Return: 155 percent. Analyst Ratings: There are no research firms covering Interphase currently. TheStreet Ratings has a "sell" rating on the stock, which it has maintained since downgrading the stock from "hold" in July 2009.
The latest report says Interphase's primary weakness is "feeble growth in its earnings per share."
3. Adolor Corp.
Company Profile: Adolor develops new products and delivers advanced pain and pain-management therapies.
Adolor wouldn't make the list of best-performing stocks under $5 this year if it weren't for a takeover bid in October from Cubist Pharmaceuticals , which will buy the company in a $415 million deal.
Share Price: $4.69 (Dec. 2) 2011 Total Return: 287 percent. Analyst Ratings: As Adolor is an acquisition waiting to happen, the analysts following the stock are split over what investors should do.
Three say the stock is still a "buy" while the other two researchers following Adolor say investors should hold onto shares.
TheStreet Ratings has a "sell" rating on Adolor shares, saying that "the company's primary weakness has been its disappointing return on equity."
2. Majesco Entertainment
Company Profile: Majesco Entertainment makes video games mainly for the family-oriented, mass-market consumer.
Majesco's run this year started in January when the company announced it had shipped more than 500,000 copies of its Zumba Fitness video game for the Wii, Xbox 360 and PlayStation 3.
Later that month, the company announced it regained compliance with the Nasdaq's minimum bid price requirement for continued listing.
In early March, shares of Majesco climbed higher after the company posted better-than-expected fiscal first-quarter financial results, with revenue jumping to $48.5 million from $29.2 million in the same period a year earlier.
In June, Majesco upped its full-year revenue outlook as it expects to ship 17 new games this year across platforms like the Xbox Kinect, Facebook, Nintendo's 3DS and Apple's iPhone.
Share Price: $3.10 (Dec. 2) 2011 Total Return: 303 percent. Analyst Ratings: Majesco garners three "buy" ratings from Needham & Co., Northland Securities and Sidoti & Co. Majesco also receives a "neutral" rating from Wedbush. The average price target of $4.42 is 42 percent above current levels.
TheStreet Ratings has a "buy" recommendation on Majesco Entertainment after upgrading the stock in October.
While TheStreet Ratings says the company has some minor weaknesses, the report lauds the company's "robust revenue growth, largely solid financial position with reasonable debt levels by most measures, notable return on equity, solid stock price performance and impressive record of earnings per share growth."
1. TeamStaff Company Profile: TeamStaff is a staffing provider specializing in health-care, logistical, information-technology and office administration personnel.
Shares of TeamStaff initially popped in May after the company was chosen as the single source for integrated medical support for the Department of Veterans Affairs' Consolidated Mail Outpatient Pharmacy program, an award that carries a total maximum value of $140 million.
The company has also been awarded other contracts, including the Navy SeaPort-e "prime" contract in July, which allows TeamStaff access to bid on $5.3 billion of services via task orders issued under the SeaPort-e program.
Share Price: $2.09 (Dec. 2) 2011 Total Return: 310 percent. Analyst Ratings: No Wall Street research analysts follow TeamStaff.
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