Boomer's Delight: Under the Radar

"Under the Radar" 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.

Healthcare Services Group(HCSG Quote), based in Bensalem, Pennsylvania, provides housekeeping, laundry and food services to nursing homes and retirement complexes. In other words, it's serving the baby-boom generation.

Over a one-year period, the company has increased revenue 12% and profit 17%. In the third quarter, Healthcare Services generated a return on equity of 15%, beating the averages of its industry and of the S&P 500 Index. Earnings per share climbed 46% to 19 cents as revenue rose 17% to $179 million.

The company's margins demonstrate steady improvement. Its quarterly gross margin rose from 13% to 14% and its operating margin stretched from 6% to 7%, helped by a decrease in selling, general and administrative expenses as a percentage of revenue.

Management reiterated that future success is contingent upon improved pricing, expanded service offerings and new contracts. In a tough business environment, the company's strongest selling point is its value.

Large-scale operations and a focus on efficiency allow Healthcare Services to execute certain functions, such as laundering clothes and cleaning rooms, at a lower cost and with faster turnaround than care-givers. As a result, its services are an easy sell to profit-focused administrators.

However, the countercyclical appeal hasn't gone unnoticed. Healthcare Services Group has rallied 22% this year, outpacing the Dow Jones Industrial Average and S&P 500. The stock trades at a trailing price-to-earnings ratio of 28 and a forward price-to-earnings ratio of 22, a premium to support-service peers.

Still, the shares offer a 4.1% dividend yield, higher than the S&P 500's average of 2.8%. But a payout ratio over 100% is a cause for concern. In some quarters, the company was unable to fund its distributions with earnings alone, so a decline in business volume might precipitate a dividend cut.