5 Fast Growing Small Cap Stocks to Watch

Written by

Jae Jun

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This is a continuation of filtering through Forbes Best Small Companies. I love to get ideas and learn about new companies from this list.

Although Forbes magazine is well circulated across the country, people are lazy and will not take the effort to go through the companies so here’s  your chance to go one up on most people.

First off, here is a spreadsheet of the top 50 stocks I compiled a couple of months back. Download this spreadsheet of the top 50 Forbes stocks.

As a quick recap, here is the method Forbes used to compile this list.

  • strong sales and earnings growth
  • publicly traded for at least a year
  • generate annual revenue between $5 million and $1 billion
  • stock price no lower than $5 a share
  • excluded financial institutions, REIT’s, utilities and limited partnerships
5 stocks ranked 11-15 will be looked at today.

#11 IPG Photonics (IPGP)

IPG Photonics is a maker of fiber lasers which are used in a wide variety of industries for welding, cutting, drilling and etching. It is used across all industries which gives IPGP the potential to continue capitalizing on its market.

Here are some video demonstrations that will immediately help you understand what fiber lasers do.

Last time around, I rated IPGP as a B+ stock.


  • Continues to increase gross margins. It’s in the 54% range compared to 49% the year before as a result of reducing cost of goods sold.
  • Plenty of cash on balance sheet with big decreased in debt. Current ratio of 5.3.
  • High ROE of 19% and CROIC of 45%


  • Share count increases every year
  • Fundamentally, IPGP doesnt’ have many weaknesses. It is solid. The only concern is the valuation.
  • CEO is 73 years old, owns more than 40% and the business depends on him
  • Laser prices are going down which could lead to drop in margins


Valuing IPGP is difficult because the company has never been at a consistent level. From 2005 to 2009, IPGP was in growth and investing mode. It wasn’t until 2010 when the company started to really reap rewards and the growth has been huge since then.

Thus the difficulty in trying to come up with a fair value.

Discounted Cash Flow

FCF isn’t a good metric to use for IPGP because of the heavy investment during its growing phase. Capex in 2005, 2006 and 2007 was $16m, $20m and $34m respectively. Those are some big jumps.

For IPGP, owner earnings is the better number to use as it eliminates working capital and adds back items such as depreciation and deferred taxes that should not be included.

IPGP has also performed extremely well over the past 5 years compared to its history. It has achieved an organic 15.4% ROE coming from healthy margin increases. See the DuPont analysis to see how it is calculated and download the spreadsheet too.

Using a discount rate of 12% and a growth rate of 16%, I get a value of $70.

Graham Valuation

Analysts are predicting an EPS of $3.16.

Using the Ben Graham formula, I get a value of $83.

Katsenelson PE Valuation

The current PE of 23 assumes that IPGP has an expected growth rate of 25%.

I believe this is too high so I’ve made an adjustment by entering the starting PE to equal 20% earnings growth which has been the historical growth rate.

This gives a fair value of $70.

If this is confusing to you, don’t worry. I’ve written a detailed step by step tutorial on the Katsenelson valuation model.

This gives a valuation range of between $70 and $83 based on the assumption that IPGP can continue its growth of at least 16% going forward.

If the company is unable to achieve such growth, then expect a hair cut on the stock price, which is what I will wait for.

Download the one page dashboard PDF of IPGP.

#12 United Therapeutics (UTHR)

United Therapeutics is a biotech company that focuses on developing drugs for small niches with unmet needs. Their main drug targets a high blood pressure disease between the heart and lungs. The disease occurs in young woman with an estimated 30,000 being treated in the United States.

It’s a small market and because of the unfulfilled needs, the pricing power is astronomically high.


  • Average revenue growth of 37% for the past 10 years but slowed down to 23% the past two years
  • 100% recession proof
  • Reduction in SG&A


  • R&D investment is decreasing
  • Increased long term debt despite strong financial position
  • Lots of gains in the “non cash items” line
  • Repurchased a big chunk of stock at its highest stock price


I am going to admit that I don’t know how to value UTHR.

The company has experienced huge growth but there are some signs of slowing down. What’s more, for the growth, the finance ratios also fall into value territory.

Check out some of these numbers:

  • EV/EBITDA of 6
  • P/FCF of 13
  • P/B of 2.5
  • ROE of 18%
  • CROIC of 21%
  • Strong Piostroski score of 7

#13 Air Methods (AIRM)

Air Methods is the largest provider in the air medical transportation industry. It’s a good business. People need emergency transport services and if you live in a rural area, you need air transport to quickly get you to a hospital.

The business is not easy to replicate either. You need a fleet or helicopters, national network of bases and pilots and trained medical staff.

Like United Therapeutics, you can see why Air Methods business is consistent and recession proof.

Some numbers to get you interested.


  • Recession proof business. Posted increases in revenue during recessions.
  • Gross profit at all time highs of 42%
  • Operating profit at all time highs of 20%
  • CROIC of 12%


  • Big debt increase from 2011
  • Cash conversion cycle increased from 97.7 in 2010 to 118 in 2012
  • Valuation ratios no longer show anything on the value side
  • ROE of 30% (more on this below and why a high ROE is included in the lowlights)

Some Ratios

  • PE of 22
  • EV/EBITDA of 25
  • Price to tangible book value of 19
  • Piotroski score of 8
  • ROE of 30% due to increases in debt

For most solid companies, ROE and CROIC come out similar. For AIRM however, ROE is much higher than CROIC. Upon looking at it further via the DuPont analysis, it shows that a major source of AIRM’s ROE comes from its debt increase. ROE is increasing due to debt.

If I adjust the equity multiplier in 2010 from 3.73 to a normal value of 2.6, the ROE drops to 21.6%. Still good, but it is much lower than 31% showing that ROE is likely inflated at the moment.

Download the PDF dashboard for AIRM.

#14 Allegiant Travel (ALGT)

Allegiant Travel is the only airline I would be willing to own. ALGT operates a low-cost passenger airline marketed to leisure travelers in small cities.

For now, I will chalk it up as another investment miss.

I wrote about ALGT back in early 2012 and the business has continued to operate superbly.

I highly recommend you to read the article to get a better understanding of how they are different to other airlines.


  • 40 profitable quarters. Unbelievable for an airline but true.
  • Revenue growth every year even during recession and 9/11
  • Strong financial position – low debt and plenty of assets for an airline
  • Piotroski score of 7
  • No signs of earnings manipulation according to the Altman and Beneish models


  • Priced at a premium to all its competitors
  • High and fixed capex
  • Cash conversion cycle is higher than competition. Currently at 6 but LUV is at -17 as airlines get paid upfront for tickets.
  • High accruals across the financial statements

Download the PDF dashboard for AIRM.


Although ALGT is profitable, cash flows are still inconsistent which means a DCF is going to be difficult.

With a projected EPS of $5.18 and growth rate of 11%, the Graham valuation shows a fair value of $121.

With ALGT trading at a premium, the absolute PE valuation model shows that ALGT can go as high up as $110 with a fair value PE of 27.

Here is another range of values using utilizing an EBIT multiple calculator.

Looks like the current price points towards a slight over valuation and nearing towards the aggressive assumptions.

Download the PDF dashboard for Allegiant Travel.

#15 Syntel (SYNT)

Finding Syntel is a pleasant surprise. The business centers on outsourcing their skills to global companies as opposed to outsourcing staff to companies which is a much lower margin business.

In a nutshell, Syntel will develop custom software applications according to a customers specifications related to their business.

There are plenty of these companies all around the world, but it is surprising to see how Syntel has achieved such success in such a competitive field.


  • Surprised to see Syntel posting increases in revenue for the past 10 years even during the recession
  • Strong gross margins averaging 43% over past 5 years and net margin averaging 23%
  • Has grown book value for 7 years without any debt
  • A big cash flow generator
  • Excellent ROE of 32% and CROIC of 100%!
  • Strongest among competitors INFY, IGTE, CTSH and WIT


  • Lots of accruals in the balance sheet and cash flow statement. A high balance sheet accrual also leads to a high ROE.
  • Low Piotroski score of 5
  • Dividend yield is a tiny 0.36%
  • Highly dependent on a small number of customers
  • Just by looking at the company quickly, the numbers can look too good to be true


With such strong fundamentals and exponential growth to date, how do you go about valuing a company like SYNT?

It obviously has excellent numbers but would I confident in assigning a growth rate of around 20% going forward?

If I’m going to assume an aggressive case of 20% growth, then the valuation I get is around $130 using the DCF method, $136 using the Graham formula and $100 with the Absolute PE method.

That’s about a 80 – 100% upside from current prices.

Other competitors are of lower quality but priced higher, so if you do a relative valuation, the fair value is around $80.

Doing an EBIT valuation which only looks at a maximum of one year going forward, the valuation range is between $32 to $72.

That’s a wide valuation range, and at this point, I’d rather keep an eye on it to see what a normal operating business level is as opposed to riding the wave up not knowing when it is going to end.

That goes for the rest of the stocks mentioned here. High flying companies that are operating at its peak so there could be a chance that it will come down at which point it would be a very compelling investment opportunity.


No positions.

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