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Under the Radar: Orchids Resists Recession

"Under the Radar" is a daily feature that uncovers little-known companies worthy of investors' consideration. Check in at 5 every morning to find out about stocks that tend to beat their bigger brethren.

Defensive stocks, which tend to resist market declines, are attractive again after the S&P 500 Index dropped 5.5% since mid-June.

It's easy to identify the blue-chip winners, like Wal-Mart (WMT), McDonald's (MCD) and Kraft (KFT). Smaller players that stand to benefit are going unrecognized.

Pryor, Okla.-based Orchids Paper Products (TIS) is a micro-cap household-products maker that could strengthen your portfolio. The company has been around only since 1998. But it has proven an immunity to recessions. Orchids Paper Products sells private-label, or "generic" brand, tissues, paper towels, toilet paper and napkins.

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U.S. consumers are trying to cut costs and reduce consumption. So when it comes time to restock paper products, families are opting for discount brands. Orchids has benefited from this trade-down effect and has achieved year-over-year and sequential earnings per share growth for five quarters.

Fiscal first-quarter revenue ascended 17% to $24 million as net income surged 358% to $2.8 million and earnings per share climbed 366% to 42 cents.

The company's capital structure is sound with just $22 million of debt and $37 million in equity. The cash balance is larger than last year's first quarter, when it stood at zero. But $1.5 million of reserves is a dangerously low amount, even for a small company.

Some investors have recognized Orchids' strengths, boosting its stock price 127% so far in 2009. But the company will retain its upward momentum if consumers continue to retrench. The stock trades at a price-to-earnings ratio of 18, indicating a premium to the market.

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