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 cleanup 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 such services as 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 influenced this rating. For the fourth quarter of fiscal 2007, American Ecology's revenues rose 21% year over year. This growth appears to have trickled down the bottom line, improving earnings per share (EPS) 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, it is still at an almost negligible level.

We feel that the company'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 2007. Finally, the stock has surged 29% over the past year, and while almost any stock can fall in a broad market decline, we believe that American Ecology should continue to move higher despite a very nice gain in the past year.

Exactech (EXAC Quote) develops, 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 implant products. Its revenues derive primarily from sales of its knee- and hip-joint replacement systems; however, revenues from the worldwide distribution of biologic materials have increased as a percentage of total revenue.

Exactech has been rated a buy since March 2007, primarily because of 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 because of the success of new products and continued growth from existing products.

Exactech performed 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 year 2007 guidance and now expects revenue for 2007 between $120.5 million and $122.5 million, with earnings per share in the range of 78 cents to 79 cents.