Top Five Small-Cap Stocks

Each week, 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, last updated Nov. 23, 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 November 2005.

Fiscal-year fourth-quarter net income increased 104% from a year ago to $1.6 million, or 38 cents a share, while revenue climbed about 32% to $9.2 million. The company has demonstrated a pattern of positive EPS growth over the past two years, and this trend is expected to continue. Powered by its strong earnings growth and other important driving factors, this stock has gone up in the last 12 months.

Naturally, any stock can fall in a major bear market. However, in almost any other environment, this stock should continue to move higher even though it has already enjoyed nice gains in the past year. 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 fiscal-year first-quarter net income increased 27% from a year ago to $7 million, or 32 cents a share, while sales rose 4% to $90 million. The stock has risen over the past year, reflecting both the market's overall trend during that period and the company's robust earnings growth. These strengths outweigh the company's low profit margins.

Neogen ( NEOG) which makes test kits for food and animal safety, has been rated a buy since November 2005. The company recently reported that fiscal-year first-quarter revenue increased 13% over a year ago to $22.9 million, while EPS improved by 19.3%. Neogen has demonstrated a pattern of EPS growth over the past two years, and this trend is expected to continue. Net income increased by 25.1% to $3.01 million in the fiscal first quarter compared with the same period last year.

The company has no debt to speak of, and it maintains a quick ratio of 2.64, which clearly demonstrates the ability to cover short-term cash needs. Investors have apparently begun to recognize these positive factors, which have helped drive up the company's shares by a sharp 100.14% over the past year.

Although almost any stock can fall in a broad market decline, Neogen should continue to move higher even though it has already enjoyed a very nice gain in the past year. And though no company is perfect, currently TheStreet.com Ratings does not see any significant weaknesses that are likely to detract from the generally positive outlook.

Pericom Semiconductor ( PSEM), which makes integrated circuits and frequency-control products, has been rated buy since February on the basis of the company's revenue, net income and operating cash flow growth over the last quarter and fiscal year. Also, Pericom has a healthy cash balance, an improved return on equity and minimal long-term debt.

Fiscal-year first-quarter net profit surged 139% over a year ago to $3.9 million, or 15 cents a share, bolstered by strong demand for its products. Sales climbed 24.8% to $38.5 million. Operating expenses edged up 1.9% to $9.92 million from $9.74 million as a result of higher selling, general and administrative expenses and stock-based compensation costs. Finally, higher interest and other income, which advanced to $1.37 million, also helped the net income increase.

During the quarter, Pericom expanded its digital video solution product portfolio by introducing a dual mode DisplayPort to DVI/HDMI Bridge. The company also launched two new HDMI switches under the same segment. To meet its target for the share-repurchase program, Pericom repurchased 454,000 shares of its stock during the quarter at an average price of $10.93 for a total of $5.00 million. On the downside, stiff competition and a weaker gross margin could negatively affect its future earnings.

Actuate ( ACTU) provides software and services for business intelligence, performance management and reporting applications. It has been rated a buy since September 2006.

The company's strengths are seen in multiple areas, including its solid stock price performance, compelling growth in net income and largely solid financial position with reasonable debt levels by most measures. These strengths should outweigh the company's weak operating cash flow. Third-quarter profit climbed 83% to $4.6 million, or 7 cents a share, while revenue jumped 9% to $34.7 million.

Actuate's stable EPS over the past year indicates that the company has sound management over its earnings and share float, and TheStreet.com Ratings believes these figures will begin to experience more growth in the coming year. Although no company is perfect, Actuate does not currently demonstrate any significant weaknesses that are likely to detract from the generally positive outlook.