STOCK PICKS: Top Five Small-Cap Stocks for Oct. 17

Each business day, TheStreet.com Ratings compiles a list of the top five stocks in one of five categories -- fast-growth, all-around value, large-cap, mid-cap and small-cap -- 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 $50 million to $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. Neogen ( NEOG) and its subsidiaries develop, manufacture and market products dedicated to food and animal safety. Our buy rating for Neogen has not changed since February 2003, based on strengths such as the company's robust revenue growth, impressive record of EPS growth and expanding margins.

For the first quarter of fiscal 2009, the company reported that its revenues, net income and EPS all represented quarterly records. Revenue growth was reported at 25.7% year over year, with revenues appearing to help boost EPS, which improved 17.2%. Net income also increased, rising 24% from $3.01 million in the first quarter of fiscal 2008 to $3.73 million in the most recent quarter. Neogen attributed its record results to the assimilation of recent acquisitions and significant growth in the company's primary product lines. Additionally, the company's gross profit margin is rather high at 54.70%, but Neogen has managed to decrease this number over the last year.

Neogen's sale price has not changed very much compared to where it was trading a year ago due to the relatively weak overall performance of the market and the company's recent mixed results. However, it is currently trading at a price that is somewhat expensive compared to the rest of its industry. Due to the strengths detailed here and a lack of significant weaknesses, we feel that higher price level is justified at this time. SY Bancorp ( SYBT) is the holding company for Stock Yards Bank & Trust, which offers a variety of financial services, including banking, investment management, trust services, brokerage services and an array of mortgage services. Our buy rating for SY Bancorp has not changed since November 2002, supported by the company's notable return on equity, expanding profit margins, good cash flow from operations, growth in EPS and solid stock price performance.

While the company's net income dropped slightly in the second quarter of fiscal 2008, EPS improved slightly to 45 cents from 43 cents in the year-ago quarter. This growth represented record EPS for the quarter. Return on equity also improved slightly, rising from 16.71% in the second quarter of fiscal 2007 to 17.22% in the most recent quarter. Gross profit margin is currently very high at 72.4%, and the company's net profit margin of 21.1% significantly outperformed the industry average. Net operating cash increased dramatically in the second quarter, rising 2,607.28% year over year to $12.74 million. In addition, the company's loan portfolio increased 14% when compared with the same quarter last year.

Management was pleased to be able to report that SY Bancorp's asset quality remained sound despite the difficult economic climate. However, the company's income from investment management and trust services has been hurt by the same factors. This portion of the company's business makes up the single largest component of its noninterest income. While SY Bancorp's stock is currently trading at a level that is relatively expensive compared to its peers, we feel that the strengths detailed above justify the higher price levels. National Research ( NRCI) assists the health care industry in the U.S. and Canada track performance at a variety of levels. We have rated National Research a buy since November 2006, based on a variety of strengths, including the company's expanding profit margins, good cash flow from operations and largely solid financial position.

For the second quarter of fiscal 2008, net operating cash flow significantly increased by 58.91% when compared with the same quarter last year. Return on equity also improved slightly year-over-year. The company's debt-to-equity ratio is very low at 0.08, implying successful management of debt levels. While National Research reported flat EPS for the second quarter versus the year-earlier period and has a recent history of volatile earnings, we feel it is poised for EPS growth in the coming year.

Although no company is perfect, we do not currently detect any significant weaknesses that are likely to detract from the generally positive outlook for this company. Diamond Foods ( DMND) processes and markets culinary, snack, in-shell and ingredient nuts. We upgraded Diamond Foods from a hold to a buy in July 2008 on the basis of the company's impressive record of EPS growth, increases in revenue and net income, and largely solid financial position.

For the fourth quarter of fiscal 2008, the company reported that its revenue increased slightly, rising 0.6% year over year. However, net income grew significantly, surging 240.3% from $0.77 million in the fourth quarter of fiscal 2007 to $2.63 million in the most recent quarter. EPS improved from 5 cents to 16 cents, and we feel that the company should be able to continue its trend of positive EPS growth seen in the past year. Diamond has a very low debt-to-equity ratio of 0.14, which implies that the company has successfully managed its debt levels. In addition, the company appears to be able to avoid any short-term cash problems. During the quarter, the company took steps to place its snack business in a better position in the market by introducing new products and adding new distribution in key markets. As a result, snack sales improved 3%, finishing the year 11% higher than full-year fiscal 2007 results. Culinary sales grew 39% in the quarter and 1.0% for the full year compared to last year.

Based on its fourth quarter and full-year fiscal 2008 results, the company released guidance for the year ahead. Management anticipates full-year EPS in the range of $1.20 to $1.27, with net sales expected to be between $585 million and $615 million. Although the company shows low profit margins, we feel that the strengths detailed above outweigh any potential weakness exhibited by Diamond at this time. Furmanite ( FRM) began as an industrial maintenance service company and is now a global organization specializing in onsite and on-line plant and pipeline maintenance. We have rated Furmanite a buy since May 2007, most recently due to the company's strong results in the second quarter of fiscal 2008.

For the second quarter, the company reported revenue growth of 20.7% year over year. In keeping with this growth, EPS improved significantly, rising from $0.10 in the second quarter of fiscal 2007 to 21 cents in the most recent quarter. Net income also increased when compared to the same quarter last year, surging 98.8% from $3.85 million to $7.66 million. Additionally, strong earnings growth of 90.90% has helped the company's stock price increase 55.79% over the past year.

Furmanite believes that it has opportunities for future growth based on worldwide economic conditions. Although the company may harbor some minor weaknesses, we do not see them as likely to have a significant impact on its future financial results.

Our quantitative rating is based on a variety of historical fundamental and pricing data and represents our opinion of a stock's risk-adjusted performance relative to other stocks.

However, the rating does not incorporate all of the factors that can alter a stock's performance. For example, it doesn't always factor in recent corporate or industry events that could affect the stock price, nor does it include recent technology developments and competitive dynamics that may affect the company.

For those reasons, we believe that a rating alone cannot tell the whole story and that it should be part of an investor's overall research.

This article was written by a staff member of TheStreet.com Ratings.

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