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Summary

  • Small cap stocks are often overlooked by investors when markets are at all-time or multi-year highs.
  • I believe that there are still undervalued/fairly priced small caps available that will make nice long term investments.
  • Out of this group of chemical stocks, I believe that FutureFuel is currently the best long term investment option.

Overview

In April/May I wrote a series of articles that ranked the Dividend Champions based on a variety of metrics. Part 1 of that article can be found here.

In this series of articles, I will be ranking stocks of the S&P SmallCap 600 index. Part 1 can be found here. I will be using the following 10 metrics to gauge each stock by:

  • Revenue Growth (past ten years)
  • Earnings Growth (past ten years)
  • Price Returns (past ten years)
  • Return on Assets (trailing twelve months)
  • Return on Equity (trailing twelve months)
  • Price to Book Value
  • Price to Free Cash Flow (trailing twelve months)
  • Debt to Equity Ratio (annual)
  • PE ratio (trailing)
  • PE ratio (forward)

The scoring system is simple. If there are 8 stocks in the industry being reviewed, then each metric will have a score between 1-8, with the best performing stock receiving an 8 and the worst performing stock receiving a 1.

For this article, I will be taking a look at the Chemical industry within the Basic Materials sector. Four stocks will be reviewed, so each metric will have available scores of 1 through 4.

Because of the higher number of stocks being looked at throughout this series, I will be relying on data provided by ycharts.

The four stocks are:

  • A. Schulman (NASDAQ:SHLM)
  • Balchem (NASDAQ:BCPC)
  • Futurefuel (NYSE:FF)
  • Lsb Industries (NYSE:LXU)

A. Schulman

ValueScore
Revenue Growth (past ten years)82.37%1
Earnings Growth (past ten years)-9.17%1
Price Returns (past ten years)79.20%1
Return on Assets (trailing twelve months)1.87%1
Return on Equity (trailing twelve months)4.67%1
Price to Book Value2.03x4
Price to Free Cash Flow (trailing twelve months)20.67x3
Debt to Equity Ratio (annual)0.43x2
PE Ratio (trailing)44.51x1
PE Ratio (forward)16.51x3

Looking at the table above, you can see that A Schulman scored a combined total of 18 points. A Schulman has seen decent growth in both revenue and its stock price; however, the company has seen a decline in earnings over the past ten years. The stock seems overvalued based on its trailing PE ratio, but appears more fairly valued based on its forward PE, assuming earnings estimates hold true.

Balchem

ValueScore
Revenue Growth (past ten years)426.50%4
Earnings Growth (past ten years)482.70%2
Price Returns (past ten years)857.20%4
Return on Assets (trailing twelve months)12.04%3
Return on Equity (trailing twelve months)13.47%2
Price to Book Value4.70x1
Price to Free Cash Flow (trailing twelve months)29.57x1
Debt to Equity Ratio (annual)0.012x3
PE Ratio (trailing)37.92x2
PE Ratio (forward)29.09x1

Looking at the table above, you can see that Balchem scored a combined total of 23 points. Balchem has seen very impressive growth across the board in terms of earnings, revenue, and stock price appreciation. The company has nice returns on assets, equity, and invested capital and carries almost zero debt. The main negative facing Balchem is that the stock appears overvalued as both its trailing and forward PE ratios are significantly higher than their averages over the past fifteen years.

Futurefuel

ValueScore
Revenue Growth (past ten years)192.40%3
Earnings Growth (past ten years)574.40%3
Price Returns (past ten years)173.70%2
Return on Assets (trailing twelve months)16.05%4
Return on Equity (trailing twelve months)21.05%4
Price to Book Value2.16x2.5
Price to Free Cash Flow (trailing twelve months)8.65x4
Debt to Equity Ratio (annual)0.011x4
PE Ratio (trailing)10.77x4
PE Ratio (forward)17.62x2

Looking at the table above, you can see that FutureFuel scored a combined total of 32.5 points. FutureFuel ranked the highest in 5 out of the ten metrics with strong returns on equity and assets, low debt, and an attractive stock price.

Lsb Industries

ValueScore
Revenue Growth (past ten years)106.10%2
Earnings Growth (past ten years)1.54K%4
Price Returns (past ten years)444.70%3
Return on Assets (trailing twelve months)7.54%2
Return on Equity (trailing twelve months)17.43%3
Price to Book Value2.16x2.5
Price to Free Cash Flow (trailing twelve months)22.83x2
Debt to Equity Ratio (annual)1.16x1
PE Ratio (trailing)14.32x3
PE Ratio (forward)13.07x4

Looking at the table above, you can see that Lsb Industries scored a combined total of 26.5 points. The company has seen the highest earnings growth out of these stocks; however, the company has considerable debt compared to the other stocks in this group.

Conclusion

FutureFuel is the highest ranked stock with a score of 32.5 points (6 points higher than Lsb Industries, 9.5 points higher than Balchem, and 14.5 points higher than A Schulman). A Schulman ranked the worst, scoring the lowest in 6 of the ten listed metrics.

I do agree with the rankings and feel that FutureFuel is currently the best long term investment option out of this group of stocks. Along with strong revenue/earnings growth and impressive returns on assets and equity, FutureFuel also has the highest yielding dividend.

FutureFuel pays a quarterly dividend of $0.12 per share (which has risen by 1 cent per year that past two years). It also has paid a yearly special dividend over the past two years.

The stock price of FutureFuel has recently dropped.

FF Chart

FF data by YCharts

I believe this presents a great time to pick up a solid company that should continue to reward long term shareholders with solid returns. As always, I suggest individual investors perform their own research before making any investment decisions.

Source: Outstanding Small Caps, Part 4: FutureFuel