Market Insider

It's Time to Tiptoe Back into Small Cap Stocks


Analysts are cautiously optimistic that after a rough 2011, small cap stocks will do better in the new year.

Zumba Fitness
Tiffany Rose | WireImage | Getty Images

Here are some of the names analysts like:

Majesco: Joining the Zumba Craze

Majesco Entertainment, a small videogame developer with a market cap of just $120 million, has been capitalizing on the global Zumba craze, and some analysts say the company has a potential to deliver strong returns to investors in 2012.

Company shares soared more than 250 percent last year and are up 20 percent year-to-date primarily thanks to its game franchise Zumba Fitness, which is based on a popular workout program with over 12 million followers worldwide.

"Zumba Fitness: Join the Party" became the number one fitness game in the U.S. last year and was a hit in the UK., selling more than 4 million units so far (including the sequel), and analysts expect that number to rise.

Majesco’s net revenue jumped 61 percent to $19.5 million in the third quarter of 2011, compared to the same quarter a year before.

“In an industry that generally requires a lot of marketing dollars, Majesco has done extremely well,” says Wanda Meloni of M2Research, a research and consulting firm. “It has shown it can make games that have wide appeal and hit a cord with a certain segment of the market.”

The company, which trades on Nasdaq, has scored buy ratings from analysts at Needham and Rodman & Renshaw.

“Risk and reward for this stock is in favor of investors,” says Rodman & Renshaw analyst Amit Dayal, who has a price target of $7 on the stock. “This could become a growth story within the video game space for 2012.”

Majesco has been successful in diversifying its platform base and is well positioned to benefit from its focus on new gaming demographic—women and families, say analysts.

However, Michael Pachter of Wedbush, who has a positive bias towards the stock but a neutral rating, says the company’s heavy dependence on Zumba Fitness games makes the stock somewhat risky.

“While we think Majesco is one hit away from significant appreciation beyond its current share price, we are not convinced that the necessary hit is in the company’s pipeline,” says Pachter's note.

Grand Canyon: Back to School

Analysts expect investors will once again warm up to for-profit education stocks, which in recent years have been crushed by regulatory scrutiny and negative publicity.

Grand Canyon Education is among analyst favorites in the group.

On Wednesday, Bank of America raised the stock to buy, and in December JP Morgan initiated it with an overweight rating.

Jeff Silber of BMO Capital, who also has a buy on the stock, says Grand Canyon is a growth story in the sector: “The company is still growing but it does not trade at a premium.”

Silber says the industry continues to shrink but things are getting ‘less worse’. “That’s enough to move these stocks.”

“Also, the environment in Washington should not be as adversarial,” adds Silber.

Grand Canyon has a strong brand presence in the Southwest and that allows it to outperform peers, according Trace Urdan of Wunderlich Securities.

“The apparent effectiveness of the company’s regional strategy and the strong demand for its ground campus provide an uncommon reassurance and predictability during this period of general uncertainty among most for-profit post-secondary school companies,” says Urdan, who has a buy rating on the stock.

Two Harbors: Housing Market Play

Another analyst favorite for 2012 is real estate investment trust Two Harbors Investment.

Credit Suisse , which is positive on the mortgage REIT sector, included the company on the 2012 list of top stock ideas between $1 billion—$2.5 billion market cap.

“Two Harbors is well positioned to both take advantage of the current environment while acting to protect current returns. We expect Two Harbors to deliver an 18 percent return on equity for 2012,” says Credit Suisse research note.

Wells Fargo analysts also likes the stock because of the company’s “strong management team and superior asset selection and risk management, and our expectation for industry-leading economic returns”.

On Wednesday, Two Harbors  priced a secondary public offeringof 34 million shares of its common stock at $9.17 per share, a 3.5 percent discount to Tuesday's close. The offering, headed by Credit Suisse, is expected to close on or about January 17.

The company wants to use the proceeds for additional acquisitions of residential mortgage-backed securities, mortgage loans and real estate and for other general corporate purposes.

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