Top 5 Small-Cap Stocks for May 15

TSC Ratings TheStreet.com Ratings provides exclusive stock, ETF and mutual fund ratings and commentary based on award-winning, proprietary tools. Its "safety first" approach to investing aims to reduce risk while seeking solid outperformance on a total return basis.

Each business day, we compile a list of the top five stocks in 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 or 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.

Hawkins ( HWKN) formulates, blends, and distributes bulk and specialty chemicals for water treatment and industrial and pharmaceutical use. We have rated the stock a buy since January 2003 on the basis of its efficiency, solvency, and solid stock price performance.

For the third quarter of fiscal 2009, the company reported very impressive revenue growth of 59.7% year over year. This growth greatly exceeded the industry average of 22.9% and appears to have contributed to improved EPS. Hawkins posted a significant change in EPS to 68 cents from 15 cents in the prior year's quarter. Net income also increased dramatically, rising 362.7% when compared to the same quarter a year ago. A further strength for the company is that it has no debt to speak of, resulting in a favorable debt-to-equity ratio of zero. To add to this, a quick ratio of 1.65 clearly demonstrates the company's ability to cover its short-term liquidity needs.

Management stated that Hawkins' business and gross profit will return to levels in line with past results over the next few months, as commodity pricing and demand have begun to level off recently. The company shows weak operating cash flow, but we feel that the strengths detailed above outweigh any potential weakness at this time.

Pervasive Software ( PVSW) provides embeddable data management and integration software products to customers worldwide. The stock has been rated a buy since April 2008. This rating is driven by a few notable strengths, including the company's solvency, attractive valuation levels, and growth in revenue and net income.

For the third quarter of fiscal 2009, the company reported revenue growth of 21.0% year-over-year. This growth beat the industry average of 6.9%, and appears to have trickled down to the company's bottom line, as EPS improved from 5 cents to 10 cents per share. Pervasive's net income increased significantly in the third quarter, rising 101.4% from $940,000 million to $1.88 million. Net operating cash flow also increased slightly, rising 7.81% to $2.14 million. In addition, Pervasive has no debt to speak of, which we consider to be a relatively favorable sign, and a quick ratio of 4.30 clearly demonstrates the company's ability to cover its short-term cash needs.

Looking ahead to the fourth quarter of fiscal 2009, Pervasive announced that it expects its revenue to be in the range of $10.5 million to $11.5 million. The company also anticipates GAAP diluted EPS of 4 cents to 7 cents in the fourth quarter. Although the company may harbor some minor weaknesses, we fell that they are unlikely to have a significant impact on future results. National Bankshares ( NKSH) operates as a bank holding company for The National Banks of Blacksburg, which provides retail and commercial banking services to individuals, non-profits, and local government units in Virginia. We have rated the company a buy since December 2008 because of a few notable strengths, including the company's solid stock price, expanding profit margins, notable return on equity, and growth in net income and EPS.

Although National Bankshares recently reported its first quarter of fiscal 2009, our current rating is based on the fourth quarter of fiscal 2008. The company posted a slight improvement in EPS in the fourth quarter, with EPS rising from 46 cents in the fourth quarter of fiscal 2007 to $0.48 in the most recent quarter. Net income also increased in the fourth quarter, rising 3.3% from $3.22 million to $3.33 million. National Bankshares' gross profit margin is rather high at 66.4% and has increased from the fourth quarter of fiscal 2007. An additional modest strength for the company is its return on equity, which improved slightly when compared to the same quarter a year ago.

The stock has risen over the past year, reflecting the earnings growth and other positive factors similar to those cited above. It goes without saying that even the best stocks can fall in an overall down market, but we do not currently see any significant weaknesses that are likely to have a significant impact on the company's future results. Under most market conditions, this stock should still have good upside potential despite the fact that it has already risen in the past year.

German American Bancorp ( GABC) is a financial services holding company based in Indiana. It operates six affiliated community banks with 29 retail banking offices, as well as a trust, brokerage, and financial planning subsidiary and two insurance agencies. Our buy rating for this stock has not changed since October 2006 and is supported by the company's notable return on equity, expanding profit margins, and strong performance relative to the S&P 500 during the past year.

For the first quarter of fiscal 2009, German American Bancorp's earnings per share remained stable year over year despite a drop in revenue. The company's gross profit margin is currently very high at 70.3% and has increased from the same quarter last year. An additional modest strength for the company is its slight improvement in return on equity, which increased to 11.78% from 11.00% in the year-ago quarter.

Management considered the first quarter results to be a solid financial performance and announced a regular quarterly dividend of 14 cents per share. Although no company is perfect, we do not currently see any significant weaknesses that are likely to detract from German American Bancorp's generally positive outlook.

NCI ( NCIT) is a provider of 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 largely solid financial position.

For the first quarter of fiscal 2009, NCI reported revenue growth of 14.8% year over year, which was higher than the industry average of 1.4%. This growth appears to have trickled down to the company's bottom line, as EPS improved 25.9% compared to the same quarter a year ago. We feel that NCI's two-year trend of positive EPS growth should continue. The company also reported increased net income, which rose 28.8% from $3.63 million to $4.68 million. An additional strength is the company's debt-to-equity ratio of 0.29, which is below the industry average and indicates successful management of debt levels. To add to this, NCI has a quick ratio of 1.55, demonstrating an ability to cover short-term liquidity needs.Management was pleased with what it considered solid results for the first quarter. Looking ahead, the company announced expectations of diluted EPS in the range of 34 cents to 36 cents for the second quarter and $1.44 to $1.52 for full-year fiscal 2009. The stock has risen 35.77% over the past year, and we feel that the stock should continue to move higher on the strength of the positive factors detailed above, despite its low profit margins. Bear in mind, however, that almost any stock can fall in a broad market decline.

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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.

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