Top Five Small-Cap Stocks

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) 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) 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.