Small-Cap Stocks With Growth Potential, High Yields

When picking stocks, investors usually look for growth or appreciation, high yields or those following current hot trends (like emerging markets, commodities, etc.). What you buy usually depends on whether you’re seeking growth or want to “play it safe.”

Imagine, though, if you could get all of the above in one stock. It’s like hitting the jackpot. Well, that’s precisely what I’m seeing in the market right now.

Remember, as stock prices drop, yields rise. Since the March 9th low, the dividend yield of the S&P 500 has dropped from 4.12% to 2.15%. At the same time, the yield on the 10-Year Treasury Note has risen from a low of just over 2% to its current level of 3.51%.

It’s a rarity to find all of these stars aligned: companies with high yields that grow along with sales and earnings established in a rising price pattern.

But I’ve spotted a few.

With ties to China and Taiwan—and an 8% yield—I like the looks of Himax Technologies (NASDAQ: HIMX), a leading producer of semiconductors used in flat-panel displays found in computer monitors, laptops, mobile phones, digital cameras and car navigation devices.

These are still selling well worldwide, and will sell like hot cakes in countries like China and India with emerging middle-class consumers hungry for Western-style goods. Himax is a recognized leader with a strong reputation, market share and huge growth potential.

Although Q1 net income fell to $4.4 million, or 2 cents a share, from $34.1 million, or 18 cents a share, a year earlier, the company forecast earnings of 7 cents to 9 cents a share on sequential revenue growth of 52 percent to 55 percent.

Analysts look for global flat-panel sales to grow 25-30% annually in the coming three to five years.

Prospect Capital (NASDAQ: PSEC), of New York, makes its money mostly in the energy sector, furnishing debt, equity and other investments, which typically run between $5 million and $50 million. Prospect's stock is trading at $9.18, good for a yield of 16% and a market cap of $385 million.

Patriot Capital Funding (NASDAQ: PCAP) is another Building Development Company (BDC), in this case providing a wide range of debt and equity financing to middle market manufacturing and service companies, or firms typically with annual sales of $10 million to $100 million. The Westport, Conn., company also furnishes revolving credit lines and term loans, among other services.

Patriot's stock is trading at just $1.59, making the yield a whopping 64%.

The next company falls under a different umbrella than ordinary stocks. It’s a  publicly traded master limited partnership (MLPs) that operates pipelines and related infrastructure.

MLPs collect a fee for transporting fuel and sometimes for processing or storing it; they don't drill for it or sell to any end users. Typically, these businesses aren't directly affected, in any great degree, to fluctuating prices for oil or natural gas.

On the other hand, energy MLPs require a steady volume of goods passing through the pipes to cover their fixed costs, While the economic downturn has slowed sales of refined products (like gasoline and jet fuel), pipelines that handle mostly natural gas have continued to thrive (like the two companies I’m about to talk about.).

You can’t simply focus on yield when choosing an MLP. Its an expensive undertaking to building and maintain a pipeline, so you want to focus on partnerships that can tap the debt and equity markets even in today's unsettled climate. Again, the MLP I like is well financed for 2009 and beyond, with plenty of cash flow to cover quarterly distributions to shareholders.

Without further ado, allow me to introduce ONEOK Partners  (NYSE: OKS), a leader in the gathering, processing, storage and transportation of natural gas in the U.S. and owns one of the nation’s premier natural gas liquids (NGL) systems, connecting NGL supply in the Mid-Continent and Rocky Mountain regions with key markets.

Since 1994, this company has racked up a total return of 382% and currently yields 8.7%. OKS focuses exclusively on gas — the safest market niche for a pipeline. Moreover, substantially all the gas gathered, processed, stored and transported by this company comes from the U.S. and Canada, limiting political risk. The partnership's distributable cash flow is expected to be in the range of $490 million to $550 million in 2009.