Best Small Companies Update and 4 Stocks to Watch

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Jae Jun

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The 2014 best small companies list is set to come out in October so this will likely be the last look at the 2013 list.

When I look at the results from when the list came out, what’s clear is that this year was difficult for stock picking.

Generally, the Forbes list does a great job of picking out strong winners.

However, the class of 2013 is a mixed bag.

Nothing exceptional.

But with any list or strategy, even with the value strategy screeners I follow, there are down periods.

It’s just a matter of keeping with it.

Here’s a recap of how the list is configured.

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The methodology used to pick the stocks that make the list is quite simple.

  • annual revenue between $5 million and $1 billion
  • stock price no lower than $5 a share
  • excluded financial institutions, REITs, utilities and limited partnerships
  • rankings are based on earnings growth, sales growth and return on equity in the past 12 months and over five years
  • dropped thinly traded names and those with fuzzy accounting or major legal troubles
  • factored in stock performance versus each company’s peer group during the last year as of Oct. 1
  • financial data is pulled from Reuters
  • fundamentals via FactSet

The reason I always tell people that this is a good list to go through is because the people at Forbes has done a lot of the work already for you.

Ranking stocks based on sales, ROE etc is easy.

But look at points 5 and 6.

dropped thinly traded names and those with fuzzy accounting or major legal troubles

factored in stock performance versus each company’s peer group during the last year as of Oct. 1

Best Small Companies Stats

Forbes uses an Oct to Oct period instead of a normal calendar year which can make it confusing. So keep that in mind.

  • S&P500 performance from October 1 to September 24: 21.3%
  • Russell 2000 performance from October 1 to September 24: 6.38%
  • 48 stocks have negative returns
  • 52 have positive returns
  • 20 stocks are beating the S&P500’s total return
  • 41 stocks are beating the Russell 2000’s total return
  • Only 3 stocks have been bought out
  • Only 7 stocks boast returns above 50% for the year

From these numbers, you can see that small stocks have struggled throughout the period.

Let’s see what comes up in the 2014 list.

4 Small Stocks Worth Looking At

Here are some stocks worth looking further into.

I’m listing these mostly based on the numbers I’m getting with the old school value analyzer. It’s a quick way to decide whether a company is a yay or a nay because you get in depth information for better and more objective decision making.

Once I find stocks I like initially, I’ll then dive into the SEC filings to try and understand the industry and business.

If you are one of our 800 members, follow along and see if you can see what I’m seeing.

j2 Global (JCOM)

What I like:

  • Business that I know well
  • Scalable business with fat margins
  • Cash cow
  • Low capex business (but increasing as they acquire more businesses)
  • No short term debt and very strong balance sheet
  • Negative cash conversion cycle

What I dislike:

Current Price: $51.15

My fair value range estimate: $50-$60


Previously wrote about it here.

What I like:

  • Great niche business of making websites for governments
  • Has a moat
  • Good revenue model with the government
  • Negative cash conversion cycle again 🙂
  • Strong balance sheet
  • Very simple financial statement to read

What I dislike:

  • FCF yield of 3.2% and magic formula yield of 4.9%
  • Still expensive

Current Price: $17.84

My fair value range estimate: $13-$18

ExlService Holdings (EXLS)

Previously wrote about it here.

What I like:

  • Macro tailwinds. Large companies will continue outsourcing.
  • Cash cow
  • No inventory to carry
  • Low working capital
  • Fixed assets is less than 10% of total assets
  • Negligible debt
  • Current valuation attractive

What I dislike:

EXLS is fundamentally very sound so it’s hard to find something specific to dislike.

Nitpicking, the Piotroski F score dropped from 8 to 6, and slow down in revenue.

Current Price: $25.19

My fair value range estimate: $27-$33

Solarwinds (SWI)

What I like:

  • Another software company in a growing industry
  • Negative cash conversion cycle
  • No debt
  • ROIC and CROIC returns dropped but still in the high 20’s

What I dislike:

  • Decrease in gross margins since 2007
  • Very low FCF yield of 4.9% and magic formula yield of 3%

Current Price: $42.76

My fair value range estimate: $37-$54

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11 responses to “Best Small Companies Update and 4 Stocks to Watch”

  1. I would never invest in J2 Global. You should know as a value investor to look beyond the numbers. First and foremost there is no economic moat here. Second, I was a customer of J2 Global and had an incredibly poor experience. They kept billing me even after multiple requests to cancel. The only way that I was finally able to resolve the issue was contacting the FCC. Then and only then they responded and resolved my issue. It looks like I am not alone either. Just take a look at customer review websites.




  2. That’s all well and good, but those numbers helped me net approx 65% off JCOM last year.

  3. Hey Curtis,

    Regarding moat, if you go into the subject, there aren’t many companies with a true moat.

    Most companies don’t have one. They just make it up. All the more true for smaller companies.

    It’s a shame that you had a bad experience with customer service, but I don’t think that should determine what it is as an investment.

  4. excellent work. Were you also looking at the forbes list or was it from another source you found JCOM?

  5. It was via a value screen. Value investing a newer experiment for me, but my foundation is in low cost indexes.

  6. That is called trading vs. investing. Value investing is buying solid companies and holding long term. You want to own a part of the company.

  7. disagree. Buffet bought Furniture Mart in his home town because of his positive customer experience. Which tends to translate into long term profits. This blog seem more like a day trading site.

  8. by the way i publicly share my portfolio and track record/results on Morningstar.com. Money where my mouth is http://socialize.morningstar.com/NewSocialize/PortfolioSharing/SharedPortfolioSnapshot.aspx?q=F140495716499AC9

  9. Now that I’ll have to disagree with.

    I’ve had bad experiences at Burger King, Ben Bridge, United Airlines etc etc. But that’s a small sample size.

    Customer service can be a moat as I wrote about previously. http://www.oldschoolvalue.com/blog/investing-perspective/why-customer-service-is-an-underrated-intangible-moat/

    But it doesn’t mean that it’s a clear indicator. Many B2B companies have horrific customer service, but some thrive and some die.

  10. This is a topic that has been disagreed upon for decades. Value investing is an extremely broad term and there are many sections within value investing. E.g. Greenblatt’s Magic Formula falls into the value investing category, but the holding period is only for 1 year. Buying net net’s could force you to hold onto horrible companies for years but that’s also value investing.

    Value investing is simply buying something you believe to be below intrinsic value.

  11. great job on the performance. Very impressed.

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