Top 5 Small-Caps Selling at a Discount

BOSTON ( TheStreet) -- The small-cap Russell 2000 Index outperformed the Dow Jones Industrial Average and S&P 500 Index in 2009. However, investors rotated into large-caps in the fall, and many smaller companies are now selling at a discount. Here are five cheap stocks with strong fundamentals.

5. Transcend Services ( TRCR) provides-medical transcription services.

The numbers: Third-quarter profit increased to $1.84 million, or 67 cents a share, as revenue increased 52% to $18.5 million. The company's operating margin fell from 18.9% to 16.1%. Transcend Services has a good liquidity position, evident in its quick ratio of 1.56. Its 0.58 debt-to-equity ratio indicates manageable leverage.

The stock: Transcend Services increased 111% over the past year, outpacing all major U.S. indices. The stock trades at a price-to-earnings ratio of 20.8, a premium to medical peers. Transcend doesn't pay dividends.

4. Orchids Paper Products ( TIS) makes paper towels and napkins.

The numbers: Third-quarter net income surged 168% to $3.8 million, and earnings per share increased 136% to 52 cents. Revenue climbed 5% to $25 million. The company's operating margin rose from 10% to 23%. Orchids has a stable financial position, reflected by its quick ratio of 3 and its debt-to-equity ratio of 0.4.

The stock: Orchids Paper Products more than doubled over the past year, outperforming major U.S. indices. The stock trades at a price-to-earnings ratio of 9.9, a discount to household-products peers. Orchids Paper Products doesn't pay dividends.

3. Atrion ( ATRI) sells health-care supplies.

The numbers: Third-quarter profit rose 12% to $4.5 million, or $2.20 a share, as revenue climbed 7% to $25 million. Atrion's operating margin widened from 25% to 26%. The company has an ideal financial position, with $19 million of cash and no debt.

The stock: Atrion soared 86% over the past year, beating major U.S. indices. The stock trades at a price-to-earnings ratio of 17.3, a discount to health-care-supply peers. Shares offer a 0.9% dividend yield.

2. Hawkins ( HWKN) sells specialty chemicals.

The numbers: Fiscal second-quarter profit declined 2% to $6.7 million, or 65 cents a share. Revenue dropped 17% to $65 million. The company's operating margin ascended from 14% to 17%. Hawkins has an ideal financial position, with $37 million of cash and no debt.

The stock: Hawkins climbed 37% over the past year, more than the Dow and S&P 500. The stock trades at a price-to-earnings ratio of 11.9, a discount to chemical peers. Shares offer a 2.6% dividend yield.

1. American Physicians Service Group ( AMPH) sells medical-liability insurance and manages investments.

The numbers: Third-quarter profit fell 10% to $6.4 million, or 92 cents a share. Revenue grew 13% to $22 million. The company's operating margin decreased from 56% to 43%. American Physicians Service Group has an admirable financial position, with $30 million of cash and $6.6 million of debt.

The stock: American Physicians Service Group advanced 12% over the past year, trailing major U.S. indices. The stock trades at a price-to-earnings ratio of 8, a discount to insurance peers. Shares offer a 1.4% dividend yield.

Now See our Top Five Mid-Cap Stocks >>>

Prior to joining TheStreet.com Ratings, David MacDougall was an analyst at Cambridge Associates, an investment consulting firm, where he worked with private equity and venture capital funds. He graduated cum laude from Northeastern University with a bachelor's degree in finance and is a Level III CFA candidate.

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