2 Extreme Small Caps

Extreme Small Cap #1: QuickSilver Inc (NYSE: ZQK)

Alan Green of Victoria, Australia founded Quicksilver in 1970. Since then the company has acquired several brands along way and has moved its headquarters to Huntington Beach, CA. I've never been to Huntington Beach, but one of my staff members, Michelle, has said it's one of her favorite places in the U.S.

Incidentally, Michelle will be at the games this weekend and helped with the research for this issue. When walking around the X-games, she'll most certainly find evidence of QuickSilver's clothing dominance - not only represented by its own line, but through its other brands, which include: Roxy, Hawk brands, and DC Shoe Company - a perennial crowd favorite.

You may have mixed feelings about QuickSilver if you pull the company profile up on Yahoo! Finance.

At first blush it appears Quicksilver has an out of control trailing P/E of 168, despite a negative annual earnings growth rate of -17 percent over the last five years.

But there is more than meets the eye going on here...

In the past five years QuickSilver has been busy with acquisitions, one of the largest being DC Shoe Company in the middle of 2004. The company bought DC Shoe Company from founders Ken Block and Danny Way, to the tune of $100 million.

By the way, you might catch a glimpse of these guys on TV competing in the X-games. Ken Block races rally cars, formally for Subaru Rally Team U.S.A. and currently for Ford, and Danny Way is one the most decorated skateboard champions of all time…they have certainly done well for themselves.

As a result of this acquisition, and others, Quicksilver has taken on a good amount of debt in its pursuit of growth. How much debt? At the end of 2009 the company had $911 million in long term debt on its balance sheet. As of the end of the most recent quarter, this has been reduced to $818 million - but the enterprise value of the company is still a whopping $1.36 billion. That's pretty hefty, in fact more than two times the heft, for a company with a market cap of just $603 million.

In 2009, QuickSilver announced it would embark on a new financial restructuring plan. And just two weeks ago, Moody's Investor Services said it may raise its corporate bond rating on $400 million of the company's debt - which is currently at 'B3', or junk status.

The potential ratings bump came just a day after QuickSilver announced an agreement with private equity firm Rhone to exchange up to $140 million in debt for stock.

If this company can get its balance sheet in order, the stock could be a strong performer. Sales growth is essentially projected to be flat for the next two years, but analysts expect earnings per share to grow by 200 percent next quarter, by 350 percent next year, and by 56 percent in 2011.

That projected earnings growth brings the company's forward PE down to a much more palatable 16. Shares have more than doubled since February when the stock was trading at $2.00. You can expect some support between $3.75 and $4.00 and conversely, resistance at $5.00 But a break above $5.00 could target the $5.50 to $6.00 range.

The impact of the restructuring plan is a potential upside catalyst - maybe not quite as high as sponsored motocross athlete Travis Pastrana will fly at the X-games - but higher nonetheless. Look for high-flying sponsors at this year's X-games to help sell Quicksilver's brands - and take a look at the company's most recent quarterly report if you're interested in buying shares. It just filed on June 9th.

Extreme Small Cap #2: Hansen's Natural Corporation (NASDAQ: HANS)

With athletes running (literally) wild and fans soaking up the rays as they watch their favorite sports idols this weekend, refreshing beverages are sure to be on everybody's minds.

At an event like this however, Pepsi and Coke are not the drink of choice - nor would anyone care to debate which of these pop-stars is better. A raging debate will ensue in L.A., but it is more likely to be which energy drink is superior.

Red Bull and Monster Energy Drink lead the pack. While Red Bull surely represents a great company with sponsored athletes pulling in huge fan bases, it is still privately owned, and thus out of our realm of investment opportunities.

But Hansen's Natural is public, so we have our winner!

Monster Energy Drink stormed onto the scene in 2002. Hans Natural Corporation of Corona, CA - already well known for preservative free sodas - decided to try and cash in on the nearly $2 billion a year energy drink market with the debut of Monster Energy Drink.

Monster has had success competing with the veteran energy drink Red Bull. In 2008 Hansen's made great strides by partnering with Coco-Cola to distribute its product internationally, and has since inked deals with Pepsi to distribute in even more countries, most notably Red Bull's home turf of Europe.

The potential to use energy drink infused rhetoric to describe Hansen's stocks is very tempting - but would likely make me an outcast in the eyes of the extreme athlete elite, so I'll ignore the temptation.

Besides, by most measures Hansen looks pretty tame. The stock is trading with a trailing P/E of 20, a forward P/E of 16 and a PEG ratio of 2.1. That last valuation metric seems a little lofty, and is the result of a rather lackluster five year expected earnings growth rate of only 8.7 percent.

The major growth for Hanson is most likely in the rear-view mirror - the company was trading around $0.50 back in 2002 but has rallied to a over $40 in the eight years since. Analysts expect Hansen will grow earnings 5 percent this year and 11.6 percent next year.

However, with big name athletes on its side, Hanson has rallied (no pun intended) over the last year, rising more than 45 percent and handily beating the broad market.

The company sponsors Kyle Loza (back to back championships in free style motocross), pro skateboarder Rob Dyrdek (has his own show on MTV), and of course, our rally racing friend Ken Block. Monster Energy, and subsequently Hansen's Natural, will likely get all of the coverage it could hope for during this year's X-games.

From a technical perspective, the stock is a great buy at $40 (if it breaks below this look for dip to $37 and change). However, I wouldn't be surprised to see the stock move higher ahead of earnings - those are due out next Thursday, August 5th.

So there you have it, action sports and investing all mixed into one great issue of Small Cap Investor Daily. As always, do your own research if you're considering buying shares. These companies will receive great exposure this weekend, with ESPN broadcasting 31 hours of X-Games events, an increase over last year's 20 hours.

ESPN reported, "X Games 16 will be delivered to more than 382 million homes and will be telecast live to 175 countries and territories, including Africa, Asia, Australia, Brazil, Canada, Caribbean, Europe, Israel, Mexico, Middle East, South America, New Zealand".

Will you be one of the 382 million homes watching?

(Source:smallstocks)