Top Small-Cap Value Stocks

Stockpickr Staff

The Hidden Values Alert portfolio on Stockpickr keeps track of stocks with market caps less than $3 billion that have high return on equity, low debt and consistent earnings and revenue. In other words: good, cheap, small-cap companies.

The portfolio currently includes 15 stocks and commentary, and we've featured the commentary on two of them below, K-Swiss(KSWS Quote) and Landstar System(LSTR Quote)

K-Swiss: Sensible Shoes

KSWS has a very healthy balance sheet with $197 million in cash and no debt. The company's net profit margin over the past five years is 13%, which is almost double the industry average. Management has done an outstanding job, as return on equity over the past five years averages more than 29% per annum. KSWS has been expanding in the international markets, where growth has been strong. The company recently formed a distribution relationship in Japan that should fuel its Asian business.

KSWS is a good company and a price of $29 or less per share represents a very good value. If KSWS can grow earnings at only 15% per annum (a margin of safety that is 65% lower than its past-five-year EPS growth rate of 43% per annum) and maintain a P/E of 13 (a margin of safety that is 7% lower than the current P/E of 14), the stock will reward investors handsomely over the next five years."

K-Swiss also appears in Fortune's Small Wonders portfolio, which offers smallcap stocks with little analyst coverage that have healthy free cash flow.

Landstar Looks Secure

Landstar System has been able to achieve a return on equity (ROE) in the mid 40 percent range over the past three years. In 2006, ROE was an eye-popping 47 percent! They have been able to do this with a long-term debt/total capital ratio of just 17 percent.LSTR has been a big buyer of its shares.

Since 2002 it has bought back over 9 million shares, decreasing the shares outstanding by over 13 percent.

Net profit margins also increased over the past five years from 3.3 percent to 4.5 percent. LSTR is a cash-generating machine. At the end of 2006, the company had $288 million in free cash flow.

Another way of looking at it: 11.5 percent of revenue turned into cash that went straight to the bottom line. If the economy does slip into a recession, LSTR should weather the storm due to its non-asset-based business model.

LSTR is a good company, and a price of $41 or less per share represents a very good value. If LSTR can grow earnings at only 16 percent per annum (a margin of safety that is 45 percent lower than its past five-year EPS growth rate of 29 percent per annum) and maintain a P/E of 18, the stock will reward investors handsomely through the next five years.

• Five-year average EPS 29%
• Five-year average revenue growth 17%
• ROE 49%
• Five-year P/E high 33
• Five-year P/E low 12
• 52-week high $49.01
• 52-week low $37.75

Landstar is also in the Rate Cut / Soft Landing portfolio of stocks that will do well if the economy is heading for a soft landing rather than a recession. Other stocks in that portfolio include Cisco(CSCO Quote), Target(TGT Quote) and eBay(EBAY Quote).

Finally, Landstar also appeared in the Top Smallcap Dividend Payers that were mentioned in Barron's March 19 issue. Other stocks in that group include Movado Group(MOV Quote) and General Maritime(GMR Quote).

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