Top Five Small-Cap Stocks

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 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.