Top 5 Small-Caps for Nov. 28

Aceto(ACET Quote) engages in sourcing, quality assurance, regulatory support, marketing, and distribution of chemically derived pharmaceuticals, biopharmaceuticals, specialty chemicals and crop protection products. We have rated Aceto a buy since August 2008. Our rating is based on a variety of strengths, including the company's impressive record of EPS growth and its largely solid financial position.

For the first quarter of fiscal 2009, the company announced quarterly sales of $93.8 million, an increase of 18% year over year. With a continued focus on cost containment and a shift in business mix contributed to a close to 200 basis point expansion in gross margin to 20.18% in the most recent period versus 18.3% a year earlier. Aceto's first quarter net income rose by over 250% when compared to the same quarter a year ago. This growth in turn helped boost EPS, which improved from 5 cents in the first quarter of fiscal 2008 to 18 cents in the most recent quarter. This continued a pattern of positive EPS growth demonstrated by Aceto over the past two years.

Management reported that sales growth in both the health sciences and chemicals and colorants segments (up 21.3% and 19.2% year over year, respectively) more than offset a 23.2% decrease in crop protection sales. The strength in the health sciences segment was attributed mainly to increased sales from foreign operations - particularly in Europe - and to increases in domestic generic and nutritional products. Sales growth in chemicals and colorants experienced good growth in pigments, dyes, and miscellaneous intermediates, as well as a boost from foreign operations, according to management. One weakness in the company's results was relatively weak operating cash flow generation. However, with a very clean balance sheet and positive working capital, we feel the positives far outweigh any negatives for the company at this time.