13 Small-Caps Crushing Analysts' Views

NEW YORK ( Stockpickr) -- Ongoing economic troubles may spell real trouble for large-cap stocks. More than 60% of the stocks in the S&P 500 count on European divisions for at least 25% of their sales. So any drag from Europe is likely to dampen profit growth in 2012 for these blue-chips.

That's not the case with small-cap stocks. These firms tend to stay closer to home, and they are more fully exposed to the ups and down of the U.S. economy. Good thing that. Right now, the U.S. economy is showing signs of life, and it could expand at a 2% to 3% pace this year, even as most European economies contract.

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You can find the small-cap stocks best-positioned to ride a firming U.S. economy by reviewing recently released quarterly results. To paraphrase Newton's Law of Motion, a company that tops estimates tends to keep topping estimates.

So we went in search of small-caps that recently topped consensus profit forecasts by a whopping 40%. We focused on stocks with a market value between $250 million and $1 billion, weeding out any stocks that trade less than 75,000 shares a day. We also wanted to be sure these companies toped earnings forecasts by a nickel. (Earnings 3 cents a share instead of a forecasted 2 cents a share isn't all that impressive).

Here's what we came up with.

These 13 companies recently delivered "blow-out quarterly results. Here's a profile of three of them that you should consider for your portfolio.

Freightcar America

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Talk about a cyclical stock. Demand for Freightcar America's ( RAIL) freight cars can dry up in a down economy as shippers simply don't have the need to justify a current fleet size. But when the economy pivots back to growth, shippers make a mad dash to line up new orders.

In hindsight, it's pretty clear that the shipping industry's needs were sated back in 2006, when this company shipped more than $1.4 billion worth of freight cars. That helped push EPS above $10. Sales then fell sharply for five straight years, bottoming out below $150 million in 2010. A rebound to $487 million in 2011 shows how much demand has picked up. Fourth-quarter results were the strongest yet, in terms of cars shipped and pricing, leading to the strongest quarterly profits in a number of years.

Better still, a 32% sequential spike in backlog sets the stage for continued strong growth. "The better than expected orders reaffirm our view that rising coal car deliveries over the next 2-3 years will be driven by coal car replacement despite the headwinds domestic utility coal is facing," note analysts at Sterne Agee. They see shares rising from a recent $27 to $35.

Freightcar America was also featured recently in " 8 Stocks Rising on Huge Volume."

Journal Communications

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The sad and steady demise at newspaper publishers has been a key investment theme for half a decade. Many venerable publishers have tumbled into bankruptcy or into the arms of rivals, and a few hearty enterprises still stand.

Count Journal Communications ( JRN) among the survivors. Though its stock fell from $20 back in 2004 to below $1 in early 2009, the company has subsequently stopped the bleeding. Shares have moved back to the $5 mark, and could head higher still.

Journal Communications publishes the Milwaukee Journal-Sentinel and a host of niche publications that target ad-driven niche segments. The company also operates 33 radio stations and 13 TV stations, and it's the broadcasting divisions that are saving the day. Journal Communications recently topped profit forecasts thanks to robust ad spending on the TV and radio stations -- a trend that should continue as the U.S. economy rebounds.

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An emphasis on cost-cutting at the publishing division has stopped the bleeding there, which has boosted company-wide results. EBITDA plunged to -$66 million in 2008, rebounded to $10 million in 2009, and has averaged around $18 million in each of the last two years.

Meanwhile, total debt has been steadily shrinking, falling from $280 million in 2005 to a recent $42 million. The relatively stronger financial shape has led management to spend some of the company's cash flow in areas where the print, broadcast and online properties can better leverage off of each other. The recent better-than-expected earnings report may be a harbinger of even better days ahead.

Red Robin Gourmet Burgers

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With every passing month, it seems as if a new burger chain has landed on the scene. Brands such as Five Guys, Snake Shack, Steak-n-Shake and Five Napkin Burger are spreading far beyond their original regions.

In that light, it's especially impressive that Red Robin Gourmet Burgers ( RRGB) just posted a nearly 5% gain in same-store sales in the most recent quarter. The chain, which was launched more than 40 years ago, has more than 450 stores across the country and appears unaffected by rising competition.

The better-than-expected sales results helped Red Robin top fourth-quarter profit estimates by 40%, and the company has now exceeded the consensus by an average of 55% over the last four quarters.

Credit goes to new CEO Stephen Carley, who's plans for a turnaround are now taking root. He's already taken roughly $12 million out of the company's cost structure and has identified more gains to come. Carley is also tinkering with a new smaller-store format, known as Burger Works, which appears to be off to a solid start.

Though shares have rebounded from their lows of last summer, they still appear quite reasonable at less than six times projected 2012 EBITDA, on an enterprise value basis. Management thinks that's too low a multiple: The board of directors has just authorized a fresh $50 million stock buyback.

These three companies have a solid degree of operating momentum, as seen by estimate-topping results, and more gains may lie ahead.


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At the time of publication, author had no positions in stocks mentioned.