rknapton (82.56)

Best of the Best 200 Small Companies: Part 1

November 04, 2009 – Comments (1) | RELATED TICKERS: PETS , JOSB , QDEL

Forbes Magazine just had their special on the "200 Best Small Companies" in the November 2nd issue.  I figured this would be a great starting point to search for potential investments because of course some of these "Best Small Companies", will end up being tomorrows "Best Large Companies", so therefore some investment opportunities probably exist within this group.

After looking at all 200 of these companies, I’ve selected a group that I think are good candidates for being successful investments.  Below is the first 6 that I think are really worth taking a close look at.


NATH (Nathan's Famous Inc.)
This company is best known for the hot dog stand that hosts the eating contest that gets by far the most coverage.  They have 254 restaurants, and the vast majority are franchised out.

Since 2007, revenues have grown slow and steady and they have been able to turn that directly into nice earnings growth.  Although the stock is trading at 16 times both trailing and forward earnings, the real value of this company to it's owners is the amount of cash they have sitting on their balance sheet.  Therefore, the company is incredibly cheap because when you take their stock price of $14.30, then deduct the $6.38 of cash they have per share, you are really in a way paying just $7.92 per share (they have no debt).  Divide that by the $0.86 in EPS and you're paying less then a 10 multiple on that enterprise value, for a nice stable company that is bound to announce a cash dividend to their shareholders at some point.

These days you can even get Nathan's Famous hotdogs from many grocery stores, so go get yourself one and mull over this annual report while enjoying a dog or 68 (the number Joey Chestnut ate at their contest this year). http://216.139.227.101/interactive/nath2009/


QDEL (Quidel Corp)
This company makes rapid diagnostic test for illnesses such as the flu.  If this H1N1 swine flu continues to be a nasty problem, this is probably a company that will continue to have great results.  Just last quarter alone, they grew revenues by a whopping 76% and earnings by a full 215%  Paying 23 times trailing and 22 times forward earnings may seem like a high multiple, but in case this company continues to have such growth rates for any length of time, then that will prove to be quite a bargain anyways.  Additionally, the average of the eight analyst estimates has increased by almost 14% over the past 90 days.  I see no reason that these upward revisions would not continue as it is becoming more apparent the swine flu has become more and more of a worry. 

Directly from their conference call on October 19th, management said this: "We had a very significant benefit during the quarter from our influenza test sales driven by a considerable increase in influenza like illness beginning in mid August", and "The emergence of the 2009 H1N1 virus, and an increase in a number of physicians using rapid flu tests to aid in the diagnosis of influenza, are the key contributing factors".  Now, it's not as if these orders are going to just dry up because distributors and end users do not have a supply anywhere close to getting through this winter which is just starting.  "With regard to influenza tests, we estimate that the majority of our domestic distributor inventories are at roughly three week supply of current end-user demand. We have also recently surveyed physicians, and based upon their feedback, believe their test on hand to be relatively low as well, with 75-percent of them expecting to reorder in the near term".  Therefore we should probably expect QDEL to have a couple very nice quarters in a row.

One more little bright spot with this company, they have $65 million in cash (which has been growing year after year), and just $6 million in debt, therefore, I would assume a cash dividend or share buyback would be announced sometime within the foreseeable future.


NVEC (NVE Corp)
NVE Corp develops and sells sensors that are used to acquire and transmit data  in industrial, scientific and medical applications.  The uniqueness of their products is that the devices us "spintronics" (a nanotechnology that relies on electron spin rather than electron charge to acquire, store, and transmit information.  I've seen pictures of these products, and they are much smaller then a fly, and some apparently weigh less then a mosquito. They have 52 patents that provides them with a moat with this technology.

Usually I avoid recommending any company who's products I don't understand fully, and I really have no idea what the competitive landscape for this company may look like in a decade from now, but I'll give this one an exception based on their great financial.  This company makes a whopping 42% profit margin!  That is insane!  I can't think of one other company that consistently can kick out that kind of margin.  Then add in their growth over the past 5 year average of 16% on their top line and 44% on their bottom line, and compare that to their trailing earnings multiple of 17 and forward estimates of 14, and you have quite a deal, especially when you consider they have $4 million in cash and no debt.

So again, although I have no idea what this may mean (from their annual report) "A limited number of other companies claim to either make or have the capability to make GMR and TMR sensors. Also, several competitors make solid-state industrial magnetic sensors including silicon Hall-effect sensors and anisotropic magnetoresistive (AMR) sensors. We believe those types of sensors are not as sensitive as our GMR or TMR sensors." I'll still be placing a small bet on this company due to the great growth rates it is experiences combined with it's incredibly fat profit margin.


TRCR (Transcend Services Inc.)
Transcend provides medical transcription services to the medical industry.  While it is trading at 25 times trailing earnings, and 17 times forward estimates, the growth rates it is having along with its great financial condition can justify this.  Last quarter they increased revenues by 44% and earning by 22% (I'd prefer to see them gaining some economies of scale and be able to translate revenue growth into a higher percentage of growth in their earnings).  None the less though, these are some great growth rates that if can continue at for any length of time, then this may be a nice bargain.  Once again, this is another company that has basically no debt (less than half a million), but has almost $8 million in cash.


JOSB (Jos. A. Banks Clothiers)
This mens apparel retailer has 425 stores in 42 states.  Even with in the face of a recession they have been able to grow revenues 27% since 2007 and earnings by 35%.  This seems company seems like quite a bargain considering it is trading at just 13 times trailing earnings and less than 11 times forward estimates (which have been getting bumped up over the past 90 days).  Add in the fact they have $0 debt and $126 million in cash, well you've got an even better deal yet.  I've yet to shop at one, but I'll be buying some stock in the company because they've proven they can manage steady growth even in rough times and are positioned excellently with their huge cash hoard.  Eventually I'd expect this company will also announce a cash dividend.  One more interesting fact: Institutional investors own 109% of this company.  You read that right.  109%.


PETS (1-800-PetMeds)
This is Americas largest Pet Pharmacy.  The research I've done in the past (while as an analyst on the Summit Investment Fund) has lead me to be a perma-bull on the future how much growth there is to still be had in the amount we spend on our pets.  This website where people can easily order all the pet medications, supplements, food, and whatever else they may need for their pets.  This company is having great growth as they have increased revenues from $162 million in 2007, up to $219 million this year.  Valuation wise this is quite attractive as this stable, recession proof company trades at 14 times trailing earnings and 12 times next years estimates.  AND, once again, this overstates the true price you are paying because the company has $0 debt, and $56 million in cash.  They've already proven investor friendly by upping their cash dividend, and I would expect with their huge cash hoard and stable earnings, that this dividend will increase further yet in the future.

Technically this stock is also trading at a very attractive level right now too.  Take a look at a 10 year chart, and from 2001 on, you can draw a very consistent support trendline on the chart.  The substantial pull-back over the past two weeks brings the stock right back to this trendline (which also matches up on a one year chart).


RK