In my recent analysis of insurance giant American International Group (AIG), I came across a small-cap property/casualty insurance play called United Fire & Casualty Co. (UFCS). With some quick financial checks, I saw this small insurer trading at just 12 times forward earnings and less than 1.5x book value. Insider ownership near 20% means that investors have management on their side, and with a forecasted PEG of 1.3 along with no debt and an excellent reputation, this Iowa-based commercial and personal insurer is completely overlooked among competitors. An analyst recently downgraded UFCS, saying the company had deteriorating pricing and a near-correct valuation; I beg to differ. The financials and free cash flow on hand contradict each statistic the analyst gave, and with UFCS indicating the possibility of a stock buyback program soon, I give UFCS a buy rating even without it being acquired. Large insurers have had a summer free of catastrophes, leaving more cash on hand to make acquisitions and diversify away from the volatile Gulf Coast and East Coast market, which I think makes UFCS a prime acquisition target and therefore a buy.

My fourth potential buyout play is a small-cap gold/copper company called Northgate Minerals (NXG). First of all, this name is obviously a speculative stock in any portfolio; at about $3.26 a share, Northgate Minerals’ shareholders indeed run the risk of NXG sinking to under $2 a share and down toward net cash at $1.10. I chose this small-cap stock because it stood out in hot sector, displayed positive financials, and owned a large share of acreage and mines from Ontario, Canada, to lower South America. Trading at under 8 times forward earnings and just 3.5x EBITDA, Northgate seems undervalued from a purely financial standpoint. But, as with the homebuilding and financial sectors, current financial valuations do not signify a complete success story waiting to emerge; investors must analyze the stock’s sector and look for a bargain entry point - like Wednesday’s pullback. The minerals sector is sizzling hot, with most large and mid-cap minerals companies operating most of their business outside of the U.S. (where foreign currencies rise as tax policies ease and inflation is under control); markets are extremely liquid, and with numerous new investors discovering the benefits of old-fashioned equities (industrials, minerals, machinery, oil) versus U.S. bonds, even more capital is driving companies’ cash flows and spurring acquisitions left and right. The obvious deal of note here is Freeport McMoRan’s (FCX) $26 billion acquisition of Phelps Dodge, where the acquirer had no problem floating over $10 billion in debt. Northgate Minerals, with over $85 million in free cash flow, operating margins of 30%, and an enterprise value of under $600M, could easily be snapped up without a second thought by any of the new acquisition-oriented mining majors. I see Goldcorp (GG) or Yamana Gold (AUY) as potential buyers of Northgate, using the acquisition to expand mining and gold expedition into the domestic United States and southern Canada. I give NXG a buy rating at the $3.15 level, and see it as a speculative growth/value blend.

My final play, in the midst of the hottest sector rotation today, is Hurco (HURC). The Indiana-based industrial technology company recently announced a filing to sell an additional $200 million in debt and stock, which will be used to fund capital commitments and acquisitions. In light of this news, I researched this small-cap ($344M market cap) and found quite interesting financials. Trading at 14x forward earnings and with a PEG of 0.65, Hurco is an excellent play on small-cap tech making a noticeable turnaround after a long period of consistent sector woes. Hurco has no debt, low capital expenditure requirements that help produce solid cash flow, and has a consistent “Goldilocks growth rate” on the top line of above 10%. HURC grows revenues 15.3% quarterly, while earnings grew 19.1%. The real attention-grabbers of this small tech stock are the industries it services and where it operates its business. Hurco Companies produces computer systems and machine operating tools for the aerospace, defense, medical equipment, energy, transportation, electronics, and computer industries, which are all some of the biggest bull markets so far this year. Additionally, the company sells products throughout North America, Europe, and Asia, while its major distributors reside in England, France, Germany, Italy, Singapore, and China. Tech giants Agilent (A) or Thermo Fisher (TMO), which both maintain enormous cash flows but with mostly domestic distribution, would benefit from acquiring Hurco, as it would quickly give them better global reach, market share, and additional machine tool technology. After huge growth in the last six months, Hurco Companies still has my buy rating around the $52.50 level, especially in this tech turnaround market.