Under the Radar: Orchids Resists Recession - TheStreet

Under the Radar: Orchids Resists Recession

Orchids Paper Products, like Wal-Mart and McDonald's, offers investors recession protection.
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"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


(WMT) - Get Report



(MCD) - Get Report




. Smaller players that stand to benefit are going unrecognized.

Pryor, Okla.-based

Orchids Paper Products

(TIS) - Get Report

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.

Although the economic outlook is murky, it appears that Americans have rediscovered thrift and, as unemployment rises, this tendency will spread. The national savings rate, a measure of how much after-tax income the average American saves, rose to a 15-year high of 6.9% in May. And during the 1970s recession, it passed 14%.

It's easy to dismiss a stock that has already doubled as "overpriced." But Orchids Paper Products might continue its run into 2010. TheStreet.com Ratings gives the stock a "buy" recommendation.

TSC Ratings provides exclusive stock, ETF and mutual fund ratings and commentary based on award-winning, proprietary tools. Its "safety first" approach to investing aims to reduce risk while seeking solid outperformance on a total return basis.