To find strong small cap stocks, the Forbes Best Small Companies is a great place to find ideas. While tens of thousands of investors may read it, I doubt many actually take action in going through the companies. That’s where you and I can be different. If you haven’t already, download this spreadsheet of the top 50 Forbes stocks.
To recap, the method used by Forbes in finalizing these strong small cap stocks is quite simple.
Sturm, Ruger & Company, Inc. is engaged in the design, manufacture, and sale of firearms to domestic customers. The Company operates in two segments: firearms and investment castings. The firearms segment manufactures and sells rifles, pistols, revolvers, and shotguns principally to a select number of licensed independent wholesale distributors primarily located in the United States.
Fundamentals are very strong since 2008. What is most impressive is the strength of the ROE, ROIC and CROIC from 2008. Inventory turnover has steadily increased from 1 turns in 2008 to 21 turns in the last twelve months. With no debt, RGR is in fantastic health and the Piotroski spreadsheet gives it a score of 7 with no signs of manipulation by the Beneish score. The growth from 2008 has purely been organic which is exceptional.
However, with the political risk involved and possibility of tighter gun control, I would not be surprised to see the intrinsic value to drop.
If RGR can continue this growth, then the Graham model suggests that $58 is a fair value, Katsenelson’s Absolute PE method comes up with a default fair value of $62, but adjusting the score for business risk and earnings predictability, the number drops to $51.
The reverse DCF shows that with a starting FCF of $40m and 12% discount rate, RGR has to grow at 17% to match the current expected price of $44.
Lowering the growth rate to 9% has a value of $30.
Over the past years, I have noticed that quite a decent number of companies get bought out. This is a sign that the metrics Forbes is putting together is something that companies also look at when it comes to acquisitions.
Not long after releasing the 2012 list, MDF has been bought out.
A provider of electronic contract manufacturing services (EMS) to advanced technology companies. The Company specializes in the custom manufacture of circuit cards and system-level assemblies; an array of cable and wire harness assemblies, and precision sheet metal components.
There isn’t much to nitpick with IEC. I previously wrote about IEC because they were listed at number 3 in the 2011 best small companies list.
Although debt makes up half of total assets, this level has been consistent and looks like the level at which IEC operates.
The only other point to consider is that you will not be getting any dividends or special dividends from this company. Management is also compensates themselves very well.
Taking a quick look at its competitors, if IEC got to a EV/EBITDA multiple of 10, it would be worth $11.
Following the Katsenelson Absolute PE valuation, the fair value PE comes out to 10 which makes it worth $7.60 because earnings predictability deducted some points.
Although ROE is high for the company at 18%, compared to the competition, IEC has the best fundamentals.
DCF comes out to around $10. Graham’s formula is overoptimistic at $16.
Questcor Pharmaceuticals, Inc. (Questcor) is a biopharmaceutical company. The Company’s primary product is H.P. Acthar Gel (repository corticotropin injection) (Acthar), an injectable drug that is approved by the United States Food and Drug Administration, for the treatment of 19 indications. As of December 31, 2011, H.P. Acthar Gel was approved for the treatment of acute exacerbations of multiple sclerosis in adults, and as monotherapy for the treatment of infantile spasms in infants and children under two years of age.
With such fast growth, it is difficult to trust multiples, so the safest bet would be use a method like the DuPont to see which aspects of the business is generating the returns.
The accruals of the company are deep in the red and this is something to look deeper into.
The company is under high uncertainty and fear over a government investigation about its drug Acthar Gel. Aetna has stopped reimbursing patients but the company is showing huge increases in the number the number of Acthar vials sold.
I’m not an expert with valuing bio stocks,especially ones with such fast growth, but if you take a look at the financial statements, growth has been exponential and there is high uncertainty.
Cirrus Logic, Inc. is a United States-based company, which supplies high-precision analog and digital signal processing components for audio and energy markets.
This article on Forbes says that CRUS is priced too low.
Using their own expectations of 15% growth, my calculation is $30 on the low end and can go up as high as $60 on optimistic earnings and growth rates.
I won’t spend much time on CRUS as it doesn’t interest me.
A specialty apparel retailer. The Company operates 713 stores in 46 states throughout the United States. It offers a line of apparel and accessories for girls and guys, including graphic t-shirts, denim, dresses, shirts, hoodies, belts, jewelry, handbags, footwear, intimate apparel and other accessories.
Seeing as how I still hold a small losing position in ARO, I may switch it over to RUE if I wanted to buy a retailer. The company has better growth prospects, better fundamentals and is lesser known. Valuation wise, it is on par with competitors.
Despite the strong expected growth, the company has no moat as can be seen by the EPV.
Capital expenditures has been increasing as the company continues to expand and with it, maintenance capex is also increasing. Notice how the Net reproduction value and EPV is similar. Shows that the company does not have a moat.
Medifast, Inc. (Medifast) is engaged in the production, distribution, and sale of weight management and disease management products and other consumable health and diet products. Medifast’s product lines include weight and disease management, meal replacement, and vitamins.
I am wrong so far in my prior assessment of MED. I previously wrote how MED was a pyramid scheme, but the company, fan base and franchises have proven me wrong so far.
News hit that that the second CEO in as little as two months has quit to pursue personal interests, which is worrisome indeed.
Based on the big stock run up, valuation ratios have increased a lot and the DuPont analysis shows that in 2010, 2011 and TTM, the ROE is falling due to a drop in margins, which is a worry sign.
Piotroski score has fallen to 4 in the TTM and in 2011, the Beneish M score showed red for the first time since 2003, a possible sign of earnings manipulation.
MED turned it around in 2009, and looking at the company from 2009 to 2012, I come up with the following fair values.
Don’t forget to submit and vote for the best 2013 stocks. I’m going to add IEC to the list because I think it has some real good qualities after looking at it again.
No login or sign up required. The 2012 is doing well, so let’s see how well we can do in 2013.
AIG is coming first with DLB second and MSFT third.
AIG: half of growing BV, no more government overhang.
DLB: company has done very well into the mobile space. Only 1-2 years ago, DLB penetration in mobile was 5%. Latest results show 15%. Very solid high margin business. Too cheap at $30. Target of $45.
MSFT: Strong but underappreciated balance sheet, play on Windows 8 success.
Agree? Disagree? Then vote for the best value stocks of 2013.