There are two major concerns facing investors right now. First, the global economy is not yet showing signs of a long-awaited upturn. Indeed, the U.S. is shaping up to be on much more solid footing than its peers (at least as evidenced by U.S. corporate profit growth in the current earnings season). That argues for companies that more squarely focused on the U.S., which usually means small-cap stocks.#-ad_banner-#

Second, the rising market tide has lifted many boats, and it’s getting harder to find true bargains. But they still exist.

I went scanning for GARP (growth at a reasonable price) stocks among the S&P 600 (small-cap index) and found more than a dozen stocks that are poised for robust profit growth in 2014, while trading at reasonable earnings multiples. (I only included companies with a market value between $250 million and $1 billion to exclude micro-caps or mid-caps that may be hiding in this small-cap index).

A quick review of the list reveals no clear themes. We don’t find a cluster of stocks in any given industry, and instead need to look at these companies on a case-by-case basis. Here’s the select group.

GARP Small Caps

Here are four stocks in this group that hold deep appeal for GARP investors.

1. Atlas Air (Nasdaq: AAWW )

This small cap actually has a significant amount of global exposure, which explains why it has very recently emerged as a deep value play. Atlas, which is involved in both air freight and military transport, told investors in late October that both of those divisions have been weaker lately, leading management to shave roughly $1 from 2013 EPS (earnings per share) guidance (to around $3.75). The military transport segment is unlikely to rebound much in 2014, but air freight pricing and volumes should rebound, as the industry typically adjusts capacity to support firmer pricing. That’s why analysts still think Atlas will earn around $4.75 a share next year, right in line with what the company earned in 2012. And the 15% plunge in the stock over the past week means you can buy into those earnings streams at a much lower price.

2. Kulicke & Soffa (Nasdaq: KLIC )

The real value in this semiconductor equipment maker lies in its balance sheet. KLIC has $525 million in net cash, which accounts for more than 50% of its market value. At this point, management should contemplate a $200 million share buyback, which would shrink the share count by 20%. Why is this stock so cheap? Because KLIC’s exposure to the copper wire bonding market has been a bad place to be, as semiconductor designs start to emphasis less use of copper. Revenues have slumped badly in recent quarters, (and just-released guidance for the current quarter promises more of the same). But year-over-year comparisons should once again be positive starting with the first quarter of 2014 as an expansion into other niches begins to pay off. Analysts are looking for gains in sales, profits and free cash flow in the current fiscal year (2014) that began last month.

3. Aegion (Nasdaq: AEGN )

Though this company has more than $1 billion in annual sales (up from $500 million in 2007 thanks to acquisitions), it’s not well known on Wall Street. The company changed its name from Insituform in 2011, reflecting that there are now a half-dozen subsidiaries under the corporate umbrella. These divisions all provide maintenance and repair of pipes, bridges, tunnels, sewer systems and mineshafts. It’s not a sexy business, but it’s reasonably lucrative, with 10% margins on earnings before interest, taxes, depreciation and amortization (EBITDA). Still, 2013 has been a challenge as some major projects have been caught up in delays. Management estimates that roughly $0.35 a share in EPS this year was lost to such delays, and explains why Aegion has missed earnings estimates for three straight quarters. Yet the year ahead is expected to see those delayed projects move forward, which should help boost EPS roughly 30% to around $1.85.

4. Francesca’s Holdings (Nasdaq: FRAN )

This boutique retailer is shaping up to be one of my favorite small-cap picks for 2014. For a deeper look, check out this article on our sister site, ProfitableTrading.com.

Risks to Consider: Small-cap stocks have had a great five-year run, rising more than 100% (compared to roughly 70% for the S&P 500 Index), and though these small caps represent relative bargains, they would be hard-pressed to rise in value if investors began to rotate out of small caps.

Action To Take –> These small caps represent an increasingly rare stock: one that has solid growth prospects and low P/E (price-to-earnings) ratios. Their low valuations likely represent a degree of downside protection in a falling market, and their growth prospects set the stage for solid upside in an extended bull market.

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