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Top Five Small-Cap Stocks: April 11

Even the best stocks can fall in a down market, but we feel that this stock has good upside potential in any other environment.

Balchem (BCPC - Get Report) develops, manufactures and markets specialty performance ingredients and products for the food, feed and mechanical sterilization industries. It produces choline products for human and animal consumption.

Choline, a vitamin-B complex, plays a vital role in the metabolism of fat and the building and maintaining of cell structures. Choline deficiency can result in reduced growth and perosis (a disease characterized by a deformity of the leg joint) in poultry. It can also contribute to fatty liver, kidney necrosis and general poor health in swine, among other symptoms. In humans, choline is recognized as playing a key role in the structural integrity of cell membranes, the processing of dietary fat, reproductive development and neural functions such as memory and muscle function.

Balchem also produces encapsulated performance ingredients for use throughout the food and animal-health industries in end products such as baked goods, refrigerated and frozen dough, processed meats, seasoning blends and confections. These performance ingredients are used to enhance nutritional fortification and improve the shelf life of prepared products.

Our buy rating for Balchem has not changed since June 2003. The company's strengths can be seen in its impressive revenue growth, solid stock-price performance and net income growth. For the fourth quarter, revenue leaped 106% year over year. Earnings per share improved 27% in the most recent quarter. Net income also increased 29% year over year to $4.16 million. Powered by strong earnings growth and other driving factors, this stock has surged 28% over the past year.

For fiscal 2007, management was pleased with the integrations of two earlier acquisitions, Chinook and Akzo, and it expects those acquisitions to continue to contribute positively to Balchem's earnings. However, management also expects rising raw material costs to be a challenge in the near term. While the company has taken pricing steps to counteract the effects of these increased input costs, such actions in the fourth quarter were not enough to offset them completely.

Additional price increases were made effective in January 2008, and management therefore expects fiscal 2008 to see continuing improvements in sales and earnings, while cautioning that global economic issues could affect the company's results.

CAM Commerce (CADA) provides a variety of software, hardware and other technical systems for retailers. Our buy rating, in place since February 2006, is based on strong revenue growth, a solid financial position and stock performance, and its improvement in net income.

Powered by its strong earnings growth of 70% during the first quarter of 2008, this stock has surged 64% over the past year. Revenue rose 37% year over year. CAM Commerce has no debt to speak of, giving it a debt-to-equity ratio of zero, which we consider a favorable sign. Net income increased 75% from the year-ago quarter.

Finally, the company has demonstrated an impressive pattern of positive EPS growth over the past two years. Looking forward, we feel that this trend should continue.

EMS Technologies (ELMG) designs, manufactures and markets products that are important 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 from to buy from hold in January 2008. This change was driven by strengths such as solid stock performance, revenue growth and a solid financial position. For the fourth quarter, revenue increased 5% year over year, and this revenue growth appears to have trickled down to the bottom line, as earnings per share 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 a year ago. Its debt-to-equity ratio of 0.06 is very low, implying effective management of debt levels. We also consider the company's 41% 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.

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.
This article was written by a staff member of Ratings.
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