Which Small Cap Stock Would Win The Heisman Cup?

Dec. 8.12 | About: iShares Core (IJR)

This year's Heisman trophy contest, which will be announced a few hours from now as I type, is a rarity. Not only are there only three candidates, which is fewer than typical, but one is a freshman (my vote to win and the odds-on favorite to be the first freshman winner ever) and another is a defensive player (only one winner previously). A few weeks ago, when I referenced George Costanza in my title, I found out that not everyone knew what I was talking about. As this is an investment website, I will avoid losing anyone by describing the Heisman Cup.

According to its mission statement,the Heisman Trophy Trust, a charitable organization that supports amateur athletics and provide opportunities for youth, awards the "Heisman Memorial Trophy" to "the college football player whose performance best exhibits the pursuit of excellence with integrity." The award has been presented every year since 1935 and includes many well known players who had fantastic professional careers as well as some that most of us might not even remember.

If stocks were judged by the criteria used to award the Heisman Cup, which include not only "excellence with integrity" but also "diligence, perseverance and hard work", who might win? My goal is to look at young and promising companies that might ultimately turn into a Roger Staubach, a Tony Dorsett, a Marcus Allen, a Doug Flutie or a Barry Sanders?

To create the universe of eligible contenders, I turned to the S&P 600 (NYSEARCA:IJR) Small-Cap index. For those who follow the Small-Cap space, this is one of two primary indices that professional investors use for benchmarking. Unlike the rival Russell 2000 (NYSEARCA:IWM), which is a lot more inclusive, the S&P 600 uses selection criteria. In my thinking, R2000 is like all colleges, while the S&P 600 is like NCAA Division 1. To continue the line of thinking, Mid-Caps are like rookies or players early in their career, while Large-Caps are veteran pros.

To construct a list of candidates, I used Baseline to screen the S&P 600 with the following constraints:

  • 2012 YTD Price Change > 40% (89 candidates)
  • 2-Year Price Change > >50% (50 candidates)
  • 5-year Price Change > 20% (37 candidates)
  • 1-year EPS Growth > 25% (31 candidates)
  • 2013 Projected EPS Growth > 20% (17 candidates)
  • 2013 Projected EPS 6-month Revisions > 10% (11 candidates)
  • 5-year EPS Growth > 9% (5 candidates)

I was trying to identify some companies with fabulous offensive production and that kept surprising the fans: Strong fundamental performance, with a stock price to match. That last one was a killer, by the way, but it was thrown in to weed out cyclical recovery plays. Several of those eliminated were from housing or construction.

Without further ado, I present the 2012 S&P 600 "Heisman" candidates:

Click to enlarge

The list is sorted from best performing YTD to lowest. I included net debt to capital - only Cambrex (NYSE:CBM) has student loans debt in excess of cash. I highlighted the three stocks that have been on monster runs for the past five years. I also included a column that shows how far below the 52-week high each of these stocks is. Finally, while it shouldn't be part of the consideration for the trophy winner, I have the forward PE to the far right. For such hustlers, only 2 of the 5 have forward PE in excess of 20X.

Before I go on, I have to say that my scouting organization failed to sign a single of these prospects last year! The closest I came was 3D Systems (NYSE:DDD), where I actually follow their rival, Stratasys (NASDAQ:SSYS), which I have preferred (but also missed!). For those not familiar with DDD, the company is a roll-up of sorts in the 3-D printing industry. There has been significant consolidation as the market has finally taken off. These machines, which like 2-D printers use consumables that drive the business models, are used for prototyping and for the manufacturing of small parts.

Lumber Liquidators (NYSE:LL) looks like it bounced back from an injury, as it actually didn't have such a great 2011. Earnings in 2011 have improved dramatically, and PE expansion has helped too. LL sells hardwood flooring with a vertically integrated business model that includes 284 stores in 46 states.

Cirrus Logic (NASDAQ:CRUS) is a semiconductor company focused primarily on audio but also energy products. Apple (NASDAQ:AAPL) is a 72% customer. Unlike DDD and LL, this is one has been around for a long, long time.

Viewpoint Financial (VPFG) is a neat story. I met the CEO (Ken Hanigan) at a conference in late August sponsored by one of their investors, Hodges & Company. Based in the Dallas area, it consists of 31 community banks with over $2 billion in deposits, mainly in the Dallas metro area but also Austin, Houston and Tulsa. While it has a 60-year history, in many ways it's a start-up that is unencumbered with legacy problem loans. As they say, they are one of the few banks that can "play offense". The PE may seem high, but it has growth and also offers a relative low P/TB ratio of 1.7X.

If you have never heard of the final candidate, Cambrex, you aren't alone, as neither had I. Let me say, this one may have snuck in! Founded in 1981, the company is focused on both new and generic pharmaceutical development, providing active pharmaceutical ingredients (the bulk of the business) and proprietary technologies. 60% of its sales in 2011 were into Europe and about 30% into North America.

I'll leave it to the readers to pick the winner, but DDD is looking like "Johnny Football" in terms of its chances! As investors, one big lesson we can learn is revealed in considering how well Heisman Trophies translate into success in the NFL. While many winners enjoy fabulous careers and ultimately reach the Superbowl, some never live up to the expectations (Ricky Williams, anyone?). On the other hand, some Heisman candidates who don't win go on to excel, like Peyton Manning. And then, of course, some of the best quarterbacks, running backs and wide receivers in the NFL were never even considered for the Heisman. Who gets your vote?

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.