Top 5 Small-Cap Stocks for Feb. 27

Each business day, TheStreet.com Ratings 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.

American Physicians Service Group ( AMPH) is an insurance and financial services firm. Its subsidiaries and affiliates provide medical malpractice insurance, as well as brokerage and investment services to institutions and high net worth individuals. American Physicians Service has been rated a buy since May 2003. This rating is supported by several positive factors, including its largely solid financial position, notable return on equity, expanding profit margins, good cash flow from operations, and growth in earnings per share. For the third quarter of fiscal 2008, the company reported that its EPS improved 35.6% year over year, rising from 73 cents to 99 cents. This continues a trend of positive EPS growth over the past two years. Return on equity improved slightly when compared to the same quarter one year prior, rising from 14.4% to 17%, while net operating cash flow increased significantly, rising 264.7% to $7.5 million. In addition, the company's debt-to-equity is very low at 0.06, implying there has been very successful management of debt levels.

Management acknowledged that the company's financial services business has been affected by overall market turmoil, but pointed out that it was able to achieve strong earnings and cash flow results while sticking with its conservative policies in regards to underwriting, reserving, and investing. The company was also able to work toward expanding its business during the quarter, with the number of policy holders increasing 6%. The company undertook cost-cutting measures and will continue to adjust its business in order achieve profitability. Although no company is perfect, we do not currently see any significant weaknesses that are likely to detract from American Physicians Service Group's generally positive outlook.

NCI ( NCIT) is a provider of information technology (IT) services and solutions to U.S. federal government agencies. The company focuses on designing, implementing, maintaining, and upgrading IT systems and networks. NCI has been rated a buy since February 2008 based on its healthy growth in revenue and net income, solid stock price performance, impressive record of EPS growth, and return on equity.

For the fourth quarter of fiscal 2008, the company reported that its revenue rose 15.2% year over year, slightly outpacing the industry average of 13.5%. This growth appears to have helped boost EPS, which rose 44% when compared to the same quarter last year. The company's EPS growth is a continuation of a pattern of positive EPS growth over the past two years. Net income also improved, increasing 48.2% from $3.3 million to $5 million. Return on equity improved slightly when compared to a year ago, and can therefore be considered a modest strength for NCI. In addition, NCI's stock price has surged 89.65% over the past year, due to strong earnings growth and other key factors.

Management stated that it felt NCI had great results for fiscal 2008, remaining on track with its strategic plan. The company expects further growth in fiscal 2009 due to new business won in 2008, such as the $173 million ITES-2S task order with the Army National Guard and Air National Guard awarded to NCI in December. Looking ahead, the company expects first quarter 2009 EPS in the range of 31 cents to 33 cents per share, on revenue of $102 million to $107 million. Although the company shows weak operating cash flow, we believe that the strengths detailed above outweigh any potential weakness at this time.

Emergency Medical Services ( EMS) provides outsourced emergency department staffing and management services to hospitals under the brand EmCare and ambulance services in 40 states under the brand American Medical Response. We upgraded EMSC to a buy in August 2008. Our rating is supported by the company's revenue and net income growth, impressive record of EPS growth, and good cash flow from operations.

For the fourth quarter of fiscal 2008, EMSC reported that its revenue rose 10.5% year over-year, just slightly higher than the industry average of 10.3%. This growth appears to have helped boost EPS, which improved significantly from 31 cents to 48 cents and continued a pattern of positive EPS growth over the past two years. Net income increased 55.5% when compared to the same quarter last year, rising from $13.4 million to $20.9 million. Net operating cash flow also increased considerably, rising 98.3% to $81 million. In addition, the company's stock price has surged 32.5% over the past year, powered by earnings growth and other key factors.

Management stated that fiscal 2008 was a successful year for EMSC, as the company expanded its core businesses and entered new markets. Looking ahead, the company believes that it is well-positioned for growth in fiscal 2009, expecting full-year diluted EPS in the range of $2.05 to $2.15.

American Physicians Capital ( ACAP) is an insurance holding company. Its primary focus is medical professional liability insurance, which it writes through its subsidiary, American Physicians Assurance Corporation. Our buy rating for American Physicians has not changed since November 2004 and is based on the company's largely solid financial rating, good cash flow from operations, expanding profit margins, solid stock price performance, and notable return on equity.

For the fourth quarter of fiscal 2008, the company's net operating cash flow increased significantly, rising 138.8% year-over-year to $15.7 million. A very low debt-to-equity ratio of 0.10 implies that the company has successfully managed its debt levels. American Physicians Capital has a gross profit margin of 40.8%, which we consider strong, while its net profit margin of 29.3% significantly outperformed against the industry. Although the company's revenue dropped 9.7% when compared to the same quarter of last year, the company's bottom was not hurt, as evidenced by increasing EPS results. EPS increased from $1.19 to $1.24 in the fourth quarter.

Looking ahead, management stated that it expects the company to exceed EPS of $4.25 in fiscal 2009 if current trends in frequency, severity, and pricing remain stable in the company's book of business. Although the company has had somewhat weak EPS growth recently, we feel that the strengths detailed above outweigh any potential weakness at this time.

Orchids Paper Products ( TIS) manufactures bulk tissue paper and converts it into a full line of tissue products, including paper towels, bathroom tissue, and paper napkins for the consumer market. Our buy rating for this stock has been in place since December 2008, when it was upgraded from a hold rating. The rating is based on the company's revenue growth, solid stock price performance, compelling growth in net income, notable return on equity, and impressive record of EPS growth.

For the fourth quarter of fiscal 2008, the company reported revenue growth of 19.8% year over year. This growth appears to have helped boost EPS, which improved from 13 cents to 34 cents over the past year. Net income surged 167.1% when compared to the same quarter a year ago, rising from $850,000 to $2.3 million. Current return on equity exceeded the company's ROE from same quarter a year ago, which is a clear sign of strength. In addition, the stock's price increased 48.7% over the past year, largely due to strong earnings growth of 161.5%.

The company stated that its fourth quarter sales and earnings results were both records for the company, as were the full-year results. Although the company's profit margins are currently low, we believe that the strengths detailed above outweigh any potential weakness.

Our quantitative rating, which can be viewed for any stock through our stock screener stock rating screener, 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.

More from Investing

Inside Carnival's Mind Blowing New Horizon Cruise Ship (Video)

Inside Carnival's Mind Blowing New Horizon Cruise Ship (Video)

Neel Kashkari: The Heart of Our Financial System Is More Radioactive Than Ever

Neel Kashkari: The Heart of Our Financial System Is More Radioactive Than Ever

McDonald's Criticized for Not Doing More in Wake of Sexual Harassment Claims

McDonald's Criticized for Not Doing More in Wake of Sexual Harassment Claims

Finding Stocks Right for You: Cramer's 'Mad Money' Recap (Friday 8/25/18)

Finding Stocks Right for You: Cramer's 'Mad Money' Recap (Friday 8/25/18)

Jim Cramer: The 10-Year Yield Could Go to 2.75%

Jim Cramer: The 10-Year Yield Could Go to 2.75%