STOCK PICKS: Top Five Small-Caps for Oct. 24

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 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.

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 earnings per share 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 24.0% 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 with 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 with 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.

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 vs. 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.

SY Bancorp ( SYBT) is the holding company for Stock Yards Bank & Trust. The company 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 a variety of strengths, such as 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 once again dropped slightly in the third quarter of fiscal 2008, the company felt that its net income per reported share remained at solid levels given current economic volatility. SY Bancorp's loan portfolio and deposits increased 14% and 19%, respectively, when compared with the same quarter last year and remained comparable to the levels in second quarter of fiscal 2008.

Management commented that the real estate in Louisville, its primary market, has remained strong and resilient so far, despite economic volatility and the real estate downturn of the last year. The company continues to focus on sound long-term fundamentals in its operations. Over the past year, capital management efforts, such as stock repurchases, helped limit the impact of lower net income on the company's earnings per share.

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 $770,000 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% for the full year compared with 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.

Merit Medical Systems ( MMSI) is a manufacturer of medical devices, primarily disposable products designed to assist physicians in diagnostic work and intervention in the areas of cardiology and radiology. Merit has been rated a buy since October 2007, based on such positive investment measures as the company's solid stock price performance, growth in revenue and net income, and largely solid financial position.

For the second quarter of fiscal 2008, the company reported revenue growth of 10.9% year-over-year. This appears to have trickled down to the company's bottom line, improving EPS, which rose from 13 cents in the prior year's quarter to 21 cents in the most recent quarter. Net income also increased, rising 61.8% from $3.60 million to $5.82 million. Merit has no debt to speak of, resulting in a debt-to-equity ratio of zero. In addition, it has a quick ratio of 2.09, which demonstrates the ability to cover its short-term liquidity needs.

Management announced that it was happy with the results of its plan for margin and profit improvement during the quarter. Automation, alternate site opportunities, overall efficiency, and lean manufacturing will continue to be points of focus going forward, as these strategies have helped deliver results despite difficulties from commodity prices and labor costs. Although the company shows weak operating cash flow, we feel that the strengths detailed above outweigh any potential weaknesses at this time.

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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