How risky are the so-called micro-cap stocks? "Very," admits Audrey Jones of Morgan Grenfell Capital Management, who warns they may be hazardous to your portfolio. But for the savvy stock picker, she says, they're "where undiscovered shares with potentially huge returns are to be found."
To find winners, Jones sifts through 4,000 stocks with market capitalizations between $10 million and $300 million. Her Morgan Grenfell micro-cap fund has outscored the Russell 2000, an index of small-caps. Through July 28 this year, Jones's fund posted a return of 15.2%, vs. Russell's 12.7%.
Three micro-caps that Jones believes are way undervalued:
-- International Comfort Products (ICP), which designs and makes heating and cooling systems for residential and light commercial use. Trading at 7 3/4 a share, the stock should double in a year, says Jones. The company makes private-label gear for Sears Roebuck and other distributors and has a 10% market share. Sales last year: $642 million.
-- Mallon Resources (MLRC), an oil-and-gas producer in New Mexico. Trading at 7 7/8 a share, the stock is cheap at four times its cash flow of $2 a share. Jones sees the stock hitting 15--"or more, if drilling escalates." She figures Mallon will earn 16 cents a share this year and $1 next.
-- Optek Technology (OPTT), produces electronic sensor components for makers of autos, security systems, computers, communications gear, medical devices, and defense systems. Jones's target for the stock, now at 15, is 30. Optek may get a new contract from General Motors related to the carmaker's new air bag. "If it gets the contract, it will add to Optek's earnings by 1999," says Jones. She expects $1.25 a share in 1997 and $1.45 in 1998.