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These Cheap Small-Cap Stocks Could Deliver Safe Growth

The opinions expressed by columnists are their own and do not necessarily represent the views of

The status of many global economies is in flux right now. I recently looked at several foreign economies that could be headed toward a downward spiral and how it could affect your portfolio.

As a result, companies that have fairly minimal foreign exposure may have the most robust near-term prospects. The U.S. economy may not be the picture of health, but possible 2% gross domestic product  growth in 2012 looks a lot better than many of our key trading partners.

The companies with greatest domestic exposure are likely to have small market capitalizations. These firms, (which I define as having market values between $200 million and $1.5 billion) are often too small to staff a set of foreign sales offices, and their lack of foreign exposure looks like a real plus right now.

I went looking for small-cap stocks that appear poised for solid sales growth in 2012 and again in 2013. I removed any companies form the list that derive more than 20% of sales from foreign markets. Lastly, it pays to be sensitive to valuations at this tricky time in the market. Each stock on the list trades for less than 12 times projected 2013 profits.

Domestic energy plays
The small-cap universe is filled with a range of oil and gas producers, along with other commodity-focused firms. Of course, prices for their products are often dictated by global market conditions, so weakness in European and Asian economies would clearly dampen profits. Only the natural gas producers are insulated from global market trends, because that commodity is primarily produced for domestic consumption.

Companies in this group that have exposure to gas (and oil) include Venoco (NYSE: VQ), Comstock Resources (NYSE: CRK), Carrizo Oil & Gas (Nasdaq: CRZO) and Bonanza Creek Energy (Nasdaq: BCEI). It's notable that the gas-focused plays on this list are expected to boost sales at a solid clip in 2012 and 2013, even as gas prices remain at multi-year lows. If natural gas prices started to rise, then these stocks could see a series of upward sales and profit revisions.

There are more than a dozen non-energy companies that also make the cut.

 A few of these companies are heavily exposed to the U.S. consumer, and your view of them should depend on your outlook for consumer spending. Still, hhgregg (NYSE: HGG), Spirit Airlines (NYSE: SAVE), Gordman's Stores (Nasdaq: GMAN) and Medifast (NYSE: MED) all appear poised for solid sales growth through internal expansion, and each trades for less than 11 times projected 2013 profits. If and when consumer spending moves onto a higher plane, then sales and profits could build a further head of steam for these stocks.

You'll also note BGC Partners (Nasdaq: BGCP), Interactive Brokers (Nasdaq: IBKR) and Evercore Partners (NYSE: EVR). Each of these firms are building market share in financial services as the industry's bigger players are retrenching from certain niches.

Two other stocks in this group have also caught my eye.

1. Santarus (Nasdaq: SNTS)
This small drug maker has been popping up in my research after I read more reports that the popular cholesterol-lowering drugs known as statins have troublesome side-effects. (I'm on a statin myself and am mildly concerned.)

Santarus buys the rights to drugs that target people with diabetes and cholesterol issues. The company recently acquired rights to Fenoglide, which is a nonstatin cholesterol reducer, and the company appears to have a deepening relationship with specialty physicians, as evidenced by rising sales. This stock has moved up recently, and an appropriate valuation is still unclear to me right now, but it's surely a name for further research.

2. American Axle (NYSE: AXL)
I'm a big believer in the thesis that the U.S. auto industry is on the mend. Domestic demand for cars and trucks keeps rising, even as demand is slumping in Europe. This makes this auto-parts supplier quite appealing. Much of its sales are tied to Chrysler and GM's (NYSE: GM) truck production. Notably, GM is set to roll out a brand new line of full-size pickup trucks next year, which is why analysts spot a steady build up in sales as we head into 2013.

Meanwhile, shares are nicely-priced at around four times projected 2013 EBITDA. Shares have fallen roughly 20% since the middle of February to below $11, yet Merrill Lynch and Citigroup, each of which has a "buy" rating, sees shares rebounding to $15.

Risks to Consider: If the stock market falls deeply from current levels, then investors may flock to the perceived safety of large-cap stocks, even as these small caps have arguably better growth prospects.

Action to Take -->
With a predominant exposure to the U.S. economy, these stocks are at less risk of seeing downward estimate revisions if European economies take a tumble. The fact they generally sport low price-to-earnings (P/E) ratios only adds to the value case.

[Note: If you haven't heard about this unique opportunity, then I want to tell you about it now. StreetAuthority has staked me with $100,000 of real money to invest in my absolute best ideas. For a limited time, you'll be able to follow along with me completely free. Go here to learn more.]

-- David Sterman

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