Investors often look in the wrong place when they are trying to find a company that can make them a lot of cash. Investors are attracted to the big name companies like Walmart’s (WMT), Exxon’s (XOM), Nike’s (NKE), and Coca Cola’s (KO) of the world. While these are all great companies that can make money for investors over time, they are not great growth stocks. Large cap stocks have a place in the portfolio of investors as income generators, defensive plays, or stable growers. Investors looking to take some risks with their cash should look for a certain type of stock.
When it comes to finding growth, small cap and mid cap companies are often my favorite place to look in the market. Small cap stocks and mid cap companies have the opportunity to become the next great growth story. That is because their overall market cap is so low. It is a lot more likely that a company like HHGregg (HGG) will increase its market net worth from $300 million to $600 million dollars than it is for Walmart (WMT) to increase its market cap from $250 billion dollars to $500 billion dollars. (I am not saying that HHGregg is a better investment right now than Walmart! I am saying that HHGregg has greater growth potential and is also a whole lot riskier.) Risk comes right along with growth. A stock with the potential to double all of your money has the potential to lose all of your money as well.
Let’s take a look at the payroll industry for an example.
ADP (ADP) and Paychex (PAYX) are not the largest players in the human resources market. They have a sizeable share of the payroll market and are the main companies recommended by advisors and fund companies. Business television programs like CNBC and Bloomberg love large companies like this. There is however a smaller player in the industry with great growth potential.
The company is Insperity.
Insperity (NSP) provides human resource services like payroll processing for many small businesses around the country. Insperity is not interested in being the benefits and payroll processor of the Fortune 500 companies. The company is interested in serving businesses small businesses with as little as 10 employees and up. This is a niche that is often overlooked as most HR firms neglect the really small businesses that need HR help.
Insperity, formerly Administaff, generates nearly $2 billion dollars in revenue. The company has managed to increase revenue 10% year over year. The small cap company with its $730 million dollar market cap has nearly $300 million in cash and absolutely no debt. The future looks bright for Insperity if the company can maintain it 50% plus earnings growth and 10% plus revenue growth. The P/E ratio of 17 is well below the industry average as well. Insperity has done a great job of handling investor capital with its 13.8% return on equity. Insperity is not only a growth stock; investors will also appreciate the moderate 2.4% yield.