Top 5 Small Cap Stocks

Each weekday, TheStreet.com Ratings compiles a list of the top five stocks in five categories -- fast-growth, all-around value, large-cap, mid-cap and small-cap -- and publishes these lists in the Ratings section of our Web site.

This list, updated daily, is based on data from the close of the previous trading session. Today, small-cap stocks are in the spotlight. These are stocks of companies that have market capitalizations of between $50 million and $500 million that rank near the top of all stocks rated by our proprietary quantitative model, which looks at more than 60 factors.

The stocks must also be followed by at least one financial analyst who posts estimates on the Institutional Brokers' Estimate System. They are ordered by their potential to appreciate.

Note that no provision is made for off-balance-sheet assets such as unrealized appreciation/depreciation of investments, market value of real estate or contingent liabilities that might affect book value. This could be material for some companies with large underfunded pension plans.

Today begins with CAM Commerce Solutions ( CADA), which engages in the design, development, marketing, installation and servicing of integrated retailing and payment processing for brick-and-mortar and e-commerce businesses. It has been rated a buy since September 2005. The company's earnings per share improved by 87.50% in the third quarter of 2007 compared with the same period last year, and it has no debt to speak of. Although the company may harbor some minor weaknesses, they are unlikely to have a significant impact on results.

LSI Industries ( LYTS) provides corporate visual image solutions to the petroleum/convenience-store industry. It has been rated a buy since September 2005. The company's revenue growth outpaces the industry average, and it has no debt to speak of. LSI's net income increased by 56.3% in the fourth quarter of its fiscal 2007 compared with the same quarter one year ago, rising to $6.96 million from $4.45 million. These strengths outweigh the company's low profit margins.

Washington Banking ( WBCO) is the holding company for Whidbey Island Bank, which provides community commercial banking services primarily in northwestern Washington. It has been rated a buy since October. The company's strengths can be seen in multiple areas, such as its revenue growth, good cash flow from operations, expanding profit margins and solid stock price performance. Washington Banking posted third-quarter net income of $2.8 million, or 30 cents a share, compared with $2.6 million, or 28 cents a share, a year ago. Revenue increased 6% to $11.8 million. The banking industry has been setting record profits. Yet, the sector's strength has been lopsided, with growth largely coming from consumers rather than business lending. With interest rates moving higher, heavily indebted consumers could be hard-pressed to keep borrowing at such a rapid clip.

Dynamex ( DDMX), which provides delivery and logistics services, has been rated buy since September 2005. The company maintains a largely solid financial position with a solid stock performance and growth in revenue, net income and earnings per share. Dynamex recently posted fourth-quarter income of $4.1 million, or 38 cents a share, up from $3.3 million or 31 cents a share, a year ago. Sales increased 14.9% to $109 million. The stock still has good upside potential even though it has already risen in the past year. Dynamex's strengths should outweigh the company's low profit margins. The air freight and logistics industry faces the continued fuel price level and volatility, which make costs uncertain. Other challenges may arise if more terrorist-related events occur and security costs become a more prevalent issue for the U.S. economy.

Axsys Technologies ( AXYS), which makes optical system components, has been rated a buy since August 2005. With the threat of terrorism across the world, the need for advanced technology to secure borders is growing. However, only a fraction of more than 150,000 miles of international borders are equipped with the latest surveillance technology. This provides the company with huge business potential. Axsys posted third-quarter profit of $4.1 million, or 37 cents a share, up from $2.7 million, or 25 cents a share, a year ago. Revenue increased 34% to $45.2 million.

The buy rating is not risk-free. Axsys' success is largely dependent on its ability to anticipate and respond rapidly to changing technological developments in the industry. Moreover, a reduction or delay in the purchase of precision optical solutions by the U.S. government could have an impact on financial performance.

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