Top Five Small-Cap Stocks
TheStreet.com Ratings Staff
03/28/08 - 10:17 AM EDT
Each business day, TheStreet.com Ratings compiles a list of the top five stocks in five categories -- fast-growth, all-around value, large-cap, mid-cap and small-cap -- and publishes these lists in the Ratings section of our Web site.
This list is based on data from the close of the previous trading session. Today, small-cap stocks are in the spotlight. These are stocks of companies that have market capitalizations of between $50 million and $500 million that rank near the top of all stocks rated by our proprietary quantitative model, which looks at more than 60 factors.
The stocks must also be followed by at least one financial analyst who posts estimates on the Institutional Brokers' Estimate System. They are ordered by their potential to appreciate.
Note that no provision is made for off-balance-sheet assets such as unrealized appreciation/depreciation of investments, market value of real estate or contingent liabilities that might affect book value. This could be material for some companies with large underfunded pension plans.
American Ecology (ECOL Quote - Cramer on ECOL - Stock Picks) is one of the nation's oldest providers of radioactive, hazardous and industrial waste management services. The company's customers are commercial and government entities, such as nuclear power plants, medical and academic institutions, steel mills, refineries and chemical production facilities.
A significant portion of the company's revenue from operating disposal facilities -- those that actively receive and treat waste materials -- comes from discrete, one-time clean-up projects, which may span weeks, months or years depending on project scope. American Ecology's Non-Operating Disposal Facilities segment consists of facilities that no longer receive waste materials but continue to be monitored and maintained as part of the treatment of previously received waste materials. Other services include waste stabilization, encapsulation and chemical oxidation.
We have rated American Ecology a buy since October 2005. Strengths such as revenue growth, a largely solid financial position and good cash flow from operations contribute to this rating. For the fourth quarter of fiscal 2007, American Ecology's revenue rose 21% year over year. This growth appears to have trickled down to the bottom line, improving earnings per share by 29% in the same period. In fact, the company has demonstrated a pattern of positive EPS growth over the past two years. A slight improvement in return on equity can be seen as a modest strength for the company. Finally, while total debt has increased slightly from the year-ago quarter, it is still at an almost negligible level.
We feel that American Ecology's strengths outweigh its low profit margins. Furthermore, for 2008, the market expects an improvement in full-year EPS to $1.20 from $1.07 in 2008. Finally, the stock has surged 29% in the past year, and while almost any stock can fall in a broad market decline, we think that American Ecology should continue to move higher despite its very nice gain.
Exactech(EXAC Quote - Cramer on EXAC - Stock Picks) develops, makes, markets, distributes and sells orthopedic implant devices, related surgical instrumentation and biologic materials to hospitals and physicians in the U.S. and 27 other countries. The company produces knee systems and other joint replacement implants. Exactech's revenues are derived primarily from sales of its knee and hip replacements; however, sales from the worldwide distribution of biologic materials have increased as a percentage of the company's total revenue.
Exactech has been rated a buy since March 2007, primarily due to a strong financial performance, higher guidance, and a currently favorable industry trend. In the third quarter of 2007, net sales increased 23% year over year to $30 million, largely due to the success of new products and continued growth from existing products.
Exactech performed well in both domestic and international markets on the revenue front; the company reported a 24% increase in revenue from the domestic market and a 21% increase in revenue from international markets. Management raised its fiscal 2007 guidance and now expects revenue between $120.5 million and $122.5 million, with earnings in the range of 78 cents to 79 cents a share.
We expect Exactech to benefit from its continued innovation and expansion. The company remains focused on improving its existing line of business, and it is also awaiting approval on several new products in both the U.S. and overseas markets. However, it is highly exposed to foreign exchange risks with its increasing share of global business, and stiff government regulation could negatively impact product approvals and therefore operating results.
Neogen (NEOG Quote - Cramer on NEOG - Stock Picks) and its subsidiaries develop, manufacture and market products dedicated to food and animal safety. The company's food safety products consist primarily of diagnostic test kits and complementary products, such as dehydrated culture material. These are sold in the U.S., Canada and parts of Europe by company sales personnel and by distributors elsewhere. Food producers and processors use these products to detect dangerous or unintended substances in human food and animal feed. Neogen's diagnostic tests are generally less expensive, easier to use, more accurate and faster than conventional diagnostic methods.
The company's animal safety segment concerns itself with pharmaceuticals, rodenticides, disinfectants, vaccines, veterinary instruments and diagnostic products for the worldwide animal safety market. Examples include drug-detection products used to detect abused and therapeutic drugs in animals and animal products, immunostimulant products for horses and dogs, and Neogen's unique equine botulism vaccine.
Our buy rating for Neogen has not changed since February 2003. The company's strengths include revenue growth, a solid financial position and a strong stock performance. On March 25, the company reported that its profits for the third quarter of fiscal year 2008 jumped 34% from those of the same quarter of fiscal 2007. Neogen reported revenue growth of 20% year over year to $25.2 million from $21.1 million. Net income also increased, growing to $2.7 million, or 18 cents a share, from $2 million, or 14 cents a share, in the third quarter of 2007. According to the company, strong sales of disposable domestic test kits helped drive the increase in profit.
Powered by its strong earnings growth and other important driving factors, this stock has surged 72% over the past year. We feel that the company's strengths outweigh weak operating cash flow and that, while any stock can decline in a broad market decline, Neogen should continue to move higher despite having already enjoyed a very nice gain in the past year.
EMS Technologies (ELMG Quote - Cramer on ELMG - Stock Picks) designs, manufactures and markets products for use in wireless communications. The company focuses on the needs of the mobile information user, with an increasing emphasis on broadband applications for high-data-rate, high-capacity wireless communications. The Defense and Space Systems segment manufactures custom-designed, highly engineered hardware for use in space and satellite communications, radar, surveillance and military countermeasures.
A subsidiary, LXE Incorporated, manufactures rugged mobile computers and wireless local area network products whose typical uses include real-time data communications on inventory movement in large warehouses, manufacturing facilities and container yards. The EMS Wireless segment manufactures base-station antennas and repeaters for PCS/cellular communications services. The SATCOM segment is a division of the company's Canadian subsidiary and manufactures earth-based antennas, terminals and other hardware for communications via satellite link.
Our rating for EMS Technologies was upgraded to buy from hold in January 2008. This change was driven by some notable strengths, such as its solid stock performance, revenue growth, and a solid financial position. For the fourth quarter of 2007, the company's revenue increased 5% year over year, and this revenue growth appears to have trickled down to the bottom line, as earnings per share (EPS) improved slightly.
The company has demonstrated a pattern of positive EPS growth over the past two years, reporting an increase to 46 cents in the most recent quarter from 44 cents in the fourth quarter of 2006. A debt-to-equity ratio of 0.06 is very low, implying effective management of debt levels. We also consider the company's 41.10% gross profit margin to be strong.
Investors have apparently begun to recognize the positive factors we see in this stock, as EMS Technologies shares rose 33% over the past year. This is a very nice gain, but we feel that the stock could move higher in the future. Bear in mind, however, that any unexpected regulatory changes and the acceptance or emergence of new standard formats are typical challenges faced by the Communications Equipment industry and could potentially affect this stock.
Natural Gas Services Group (NGS Quote - Cramer on NGS - Stock Picks) is a Texas-based company that provides small- to medium-horsepower compression equipment to the natural gas industry. The company focuses primarily on the non-conventional natural gas production business in the United States. This includes coalbed methane, gas shales and so-called tight gas. According to data from the Energy Information Administration, non-conventional gas production is the single largest and fastest growing segment of U.S. gas production.
Natural Gas Services manufactures, fabricates and rents natural gas compressors that enhance the production of natural gas wells. The company also provides maintenance services for its compressors, and sells custom-fabricated compressors, as well as flare systems for oil and gas plant and production facilities. By renting compressors from Natural Gas Services, customers are able to increase their revenues through greater equipment run-time and can also reduce compressor downtime, operating and maintenance costs, and capital investments.
We have rated Natural Gas Services a buy since December 2006. Multiple strengths, such as compelling growth in net income and robust revenue growth, have influenced our rating for this stock. For the fourth quarter of fiscal 2007, net income increased by 56% year over year, rising from $2.3 million to $3.6 million. For the same period, revenue rose 18%, and this growth appears to have helped boost earnings per share. The company reported significant EPS growth from 19 cents in the fourth quarter of 2006 to 30 cents in the most recent quarter. Finally, Natural Gas Services has a very low debt-to-equity ratio of 0.13, and we consider the company's gross profit margin of 44% to be strong.
Management feels that the company's fourth-quarter results continue to indicate that Natural Gas Services is a leader in the market. The company is encouraged by future opportunities and its ability to capitalize on them, and expects to add a record 300 to 350 compressors to its fleet in 2008. We feel that the company's strengths outweigh the fact that it generates somewhat weak operating cash flow, but it is important to recognize that the industry is cyclical, with fortunes directly tied to the general tenor of economic activity that in turn drives energy demand.
Our quantitative rating is based on a variety of historical fundamental and pricing data and represents our opinion of a stock's risk-adjusted performance relative to other stocks.
However, the rating does not incorporate all of the factors that can alter a stock's performance. For example, it doesn't always factor in recent corporate or industry events that could affect the stock price, nor does it include recent technology developments and competitive dynamics that may affect the company.
For those reasons, we believe that a rating alone cannot tell the whole story and that it should be part of an investor's overall research.
