- Small growth stocks have gotten hit hard this year, but FutureFuel has bucked the trend.
- The firm has been growing earnings and revenues at a stellar clip.
- Its strong balance sheet also earns it high marks from several of my guru-inspired models.
So far, 2014 has been a rough year for many small-cap growth stocks. Many - but not all.
Take small-cap manufacturer FutureFuel Corp. (NYSE:FF). This Missouri-based company's shares have risen about 30% so far in 2014 (through April 24). They've done so largely on the back of a very strong fourth-quarter 2013 earnings announcement that was delivered in mid-March. FutureFuel's earnings-per-share more than quadrupled versus the year ago quarter, jumping from $0.15 to $0.61. Sales, meanwhile, surged 68% in the quarter.
While smaller momentum stocks have been hit hard in the recent market downdraft, my Guru Strategies - investment models based on the approaches of some of history's most successful investors - think that FutureFuel is one small, high momentum stock that is worth a long hard look. These strategies issued a Trade Alert for FutureFuel earlier this month. Historically, stocks with FutureFuel's fundamental characteristics have gone on to gain an average of nearly 10% over the ensuing three months, nearly tripling the average S&P 500 return. The alert, which runs through July 2, was a "consensus" signal, meaning that several of my strategies were in agreement that the stock looks like a potential winner.
The Future Is Now
FutureFuel is small ($890 million market cap, $445 million in trailing 12 month sales) and it gets about two thirds of its revenues from a fairly nascent industry: biofuels - it produces biofuels using soybean oil, beef tallow, and pork lard as feedstock. But the company, formed in 2005, has established itself as a strong player in both the biofuel business and the chemical manufacturing industry. In 2013, it was ranked as one of the top 100 small public companies in America by Forbes magazine, the third year in a row it received the honor.
Government regulations and incentive structures can have a significant impact on alternative energy businesses, but the chemicals portion of FutureFuel's business provides some nice stability for the firm. It involves two main categories of products: custom chemicals made for specific customers, and specialty products sold to multiple customers. And while the company gets more revenues from its biofuels operations, it actually gets slightly more gross profits from its chemicals business.
While many investors will play the biofuels industry based on macroeconomic speculation, my models are more interested in FutureFuel's financials and fundamentals. My Peter Lynch-based model, for example, likes the company's 29% long-term EPS growth rate (using an average of the three-, four-, and five-year EPS growth rates). Lynch famously used the PE-to-growth ratio to find growth stocks selling on the cheap, and when we divide FutureFuel's very reasonable 12.0 price/earnings ratio by its long-term growth rate, we get a PEG ratio of just 0.42. This model considers anything below 1.0 acceptable, and anything below 0.5 to be the best case, so FutureFuel shares look quite attractive on that basis. Lynch also liked conservatively financed firms, and FutureFuel clearly fits the bill - its debt/equity ratio is a mere 0.35%.
The Lynch-based model isn't alone in finding a lot to like about FutureFuel. The strategy I base on the writings of Motley Fool co-creators Tom and David Gardner gives the stock a solid 73% score. This top-performing model likes the company's 16.6% profit margins (after-tax), stellar growth last quarter, low debt, and declining inventory/sales ratio (11.9% last year, 9.5% this year), which is a sign that its products are in demand.
My Martin Zweig-based model, meanwhile, gives FutureFuel a 77% score. It likes that both earnings and sales growth are not only high, but accelerating. Sales growth was 68% last quarter, up from 37% the previous quarter. And earnings-per-share grew at 307% last quarter, which was up from an average of 64% in the three previous quarters, which was up from the long-term rate of 29%. The Zweig-based model also likes that FutureFuel's debt/equity ratio is far below its industry average (61%).
Finally, my Momentum Investor approach has some interest in FutureFuel. It likes the firm's strong EPS growth last quarter, its 83 relative strength over the past 12 months, and its stellar 25.1% return on equity.
As I noted earlier, smaller stocks and higher growth and momentum stocks have been among the casualties of the recent market pullback, and FutureFuel could face short-term volatility if that continues. But if that's the case, it will be due to a guilt-by-association effect that's likely to only make shares of this fundamentally sound, financially solid company more attractive. In fact, while this Trade Alert is a three-month alert, FutureFuel may well be a good longer-term play, too, so long as its fundamentals continue to look strong. And if it does go through any short-term trouble, it's worth noting that you'll be paid to wait - FF is trading at a decent 2.3% dividend yield. My strategies think all of that makes FutureFuel's future look quite bright.