2 stocks offer opportunities

after falling sharply in the past 6 months, shares of crox appeared to have found a floor. yet a weak earnings report from crox sent the stock down another 40% today. this is the main challenge investors in small-caps face in this market: bad earnings reports can absolutely punish these stocks.

sell-side analysts were caught off guard, as they seemed generally bullish on crox heading into the quarterly report. moreover, many media pundits were predicting that we have hit bottom in terms of share prices, as they likely already reflect a weak earnings outlook and a possible recession.

as investors in crox will tell you, this is clearly not the case.

there continues to be numerous risks in the small-cap space -- notably in the under-$10 universe -- as there remains more downside risk than upside potential in many situations, regardless of the fundamental growth profile.

for example, most small-caps that miss estimates are declining more than 15%, and those that happen to beat earnings estimates usually see a quick run-up in the stock price followed by a gradual selloff in the weeks ahead. this has become the norm, given that investors want to lock in profits in this tough environment, but also makes stock selection difficult.

that stated, 2 stocks worth watching are rad and mea.

last week, Rite Aid reported in-line fourth-quarter results, but weak guidance for the year ahead pushed the stock sharply lower. looking at the bigger picture, gross margins beat estimates in the quarter, its integration of Brooks/Eckerd is gaining traction and should be completed within six months, and the company will be going up against easy comps in coming months.

the stock is at about 2.50, about 20% lower since the 4/10 earnings report, but the risk/reward has become more favorable. seeing the stock fall to about 2 would make it very interesting indeed.

mea recycles scrap metal, and the rise in metal prices has flowed straight to the bottom line. however, analyst's optimistic growth estimates are based on future acquisitions, so the company could have a minor setback when it reports earnings april 24. this could provide an opportunity to pick up this inflation-hedged play at a discount, as the outlook for metal prices is expected to continue rising due to limited supply and strong global demand. i'm going to look more closely at this name after the quarter is reported.