BOSTON ( TheStreet) -- A handful of small- and mid-cap industrial stocks may rise as much as 82% in the next year, S&P Capital IQ analysts predict. They say the companies' sales growth will accelerate because of demand from fast-growing emerging markets and a recovery at home in the U.S.The ratings firm also said in its research report released this week that the six firms it recommends will gain operating leverage, translating into bigger profits. As revenue rises, it will trickle down to earnings faster because of aggressive cost-cutting initiatives taken during the economic downturn of 2008 and 2009. What's more, the stocks are bargains, with depressed valuations. S&P Capital IQ's equity analysts say the companies are trading at about 16 times their trailing 12-month earnings and significantly below 12-month share-price targets. The S&P 500 Index is down 0.85% this year, while the industrials sector has slumped 3.8%. Here is a synopsis of the six firms that S&P favors: Kelly Services ( KELYA), an employment-services firm with a market value of $530 million, gets high marks from S&P, as it says the company "has the most upside potential currently" of this group of stocks. S&P Capital IQ's target price is a potential upside of 82% from its current $14.28. Risks to S&P Capital IQ's recommendation, which are pretty widespread, are "a resumed global economic downturn, stagnation in labor markets, the company's inherently cyclical business." And S&P said a potential cloud is that the company's chairman has a 90% voting control via a separate share class. Offsetting these risks is Kelly's solid balance sheet with no long-term debt and strong free cash flow, according to S&P Capital IQ equity analyst Michael Jaffe. He expects revenue growth to slow next year, although still rising 9%, after a projected 13% advance this year.
Revenue for building-products supplier A.O. Smith ( AOS) is projected to grow 14% in 2012 after an expected 13% increase this year, according to S&P Capital IQ equity analyst Kevin Kirkeby. The sales figures include a gain from a contribution by the Lochinvar acquisition completed in August, as well as the company's Chinese operations as the number of stores carrying its products has expanded significantly, he said. Kirkeby thinks the stock has 49% potential upside. The risks to his recommendation and target price include weaker-than-expected new construction markets in the U.S. and China, higher-than-expected costs for raw materials and energy, and higher spending on new-product rollouts. "This is offset by what we view as strong cash flow, diversification of customers and industries, and focus on high-growth international markets, notably China and India," Kirkeby said.
United Rentals ( URI) rents and sells more than 600 types of equipment, ranging from heavy machinery to hand tools, at more than 700 locations in North America. The company's shares are up 24% this year and have a three-year average annual return of 52%, giving it a $2 billion market value. It has a forward price-to-earnings ratio of 12. S&P Capital IQ equity analyst Jim Corridore said in his research note that he thinks the economy is "near the start of a new cyclical upturn in nonresidential construction," and expects investors to rotate into United on brighter economic news. "Given the tenuousness of the current recovery, many companies are opting to rent equipment, which is driving increased demand" for the company's rentals, "even without a booming economy," he says. He says that nonresidential construction has bottomed, and has as a "strong buy" rating on its shares.