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While the media pundits tell the world that the only place to hide out during this market turmoil is large cap companies, we disagree. While we think there is plenty of opportunity in large caps, that doesn’t mean that small cap stocks should just be written off by default. Currently, there are plenty of small caps with strong profitability, operating with little debt, that have the capability to ride the storm of uncertainty. While small caps may not be popular today, perhaps that’s one of the best reasons to review them.

Operating margin is a profitability margin that demonstrates what amount of revenue is left over after variable and other costs. A strong operating margin is always a positive but it needs to be reviewed against the industry average and company trends over time.

We ran a screen for small cap companies that had strong profitability (one-year operating margin>15%). From this pool, we then screened for companies that had a low debt equity ratio (X<.4). At face value, the less reliance companies have on debt, the less likely their capital structures are to be affected by the US debt downgrade. We did not screen out any sectors.

The list is ranked from highest to lowest by Operating Margin. Short interest info as of July 29.

1. Universal Health Realty (UHT)

Sector

Real Estate

Industry

REIT - Healthcare Facilities

Market Cap

$ 442M

Beta

0.44

Analyst Sentiment

1/1 -List Hold/Neutral (Neutral)

The company is a real estate investment trust that invests in health care and human service related facilities. The firm’s one-year operating margin is 52.99%. UHT’s debt/equity ratio is 0.11.

2. Diana Shipping, Inc. (DSX)

Sector

Industrials

Industry

Shipping & Ports

Market Cap

$ 661M

Beta

1.56

Analyst Sentiment

10/19 -List Buy/Outperform (Bullish)

The company operates a fleet of dry bulk vessels that transport commodities worldwide. The firm’s one-year operating margin is 48.52%. DSX’s debt/equity Ratio is 0.30. The short interest is 3.20%.

3. Montpelier RE Holdings (MRH)

Sector

Financial Services

Industry

Insurance - Property & Casualty

Market Cap

$ 991M

Beta

0.73

Analyst Sentiment

4/4 -List Hold/Neutral (Neutral)

The company is a global provider of property and casualty reinsurance and insurance products. The firm’s one-year operating margin is 28.15%. MRH’s debt/equity ratio is 0.22. The short interest is 3.50%.

4. Global Indemnity PLC (GBLI)

Sector

Financial Services

Industry

Insurance - Property & Casualty

Market Cap

$ 564M

Beta

0.87

Analyst Sentiment

1/1 -List Hold/Neutral (Neutral)

The company specializes in property and casualty insurance. The firm’s one-year operating margin is 25.32%. GBLI’s debt/equity ratio is 0.13. The short interest is 30.90%. Given the short interest, this could either be a short favorite or potentially a great short squeeze.

5. Power-One, Inc. (PWER)

Sector

Technology

Industry

Electronic Components

Market Cap

$ 793M

Beta

2.18

Analyst Sentiment

10/17 -List Buy/Outperform (Bullish)

The company designs and manufactures power conversion and power management products for a variety of industries. The firm’s one-year operating margin is 25.27% PWER’s debt/equity ratio is 0.11. The short interest is 43.80%. Given the short interest, again this could either be a short favorite or potentially a great short squeeze.

6.
Dice Holding
(DHX)

Sector

Industrials

Industry

Staffing & Outsourcing Services

Market Cap

$ 705M

Beta

2.61

Analyst Sentiment

5/7 -List Buy/Outperform (Bullish)

The company builds career websites for certain professional communities. The firm’s one-year operating margin is 24.93%. DHX’s debt/equity ratio is 0.06. The short interest is 13.50%. Given the short interest, once again this could either be a short favorite or potentially a great short squeeze.

7. Net 1 Ueps Technologies, Inc. (UEPS)

Sector

Industrials

Industry

Business Services

Market Cap

$ 315M

Beta

1.23

Analyst Sentiment

2/2 -List Buy/Outperform (Bullish)

The company provides electronic payment system as an alternative payment system in regions of the world that are unbanked or under-banked. The firm’s one-year operating margin is 24.90%. UEPS’s debt/equity ratio is 0.36. The short interest is 0.50%.

8. TransMontaigne Partners L.P. (TLP)

Sector

Energy

Industry

Oil & Gas Midstream

Market Cap

$ 467M

Beta

0.60

Analyst Sentiment

4/4 – List Hold / Neutral (Neutral)

This one provides integrated terminaling, storage, transportation and related services for companies engaged in the distribution and marketing of refined petroleum products and crude oil. The firm’s one-year operating margin is 20.68% TLP’s debt/equity ratio is 0.33. The short interest is 0.20%.

9. ReneSola Ltd. (SOL)

Sector

Technology

Industry

Solar

Market Cap

$ 307M

Beta

2.78

Analyst Sentiment

7/12 -List Hold/Neutral (Neutral)

ReneSola is a manufacturer of solar wafers, which are thin sheets of crystalline silicon material primarily used in the production of solar cells. The firm’s one-year operating margin is 20.40%. SOL’s debt/equity ratio is 0.21.

10. Spreadtrum Communications (SPRD)

Sector

Technology

Industry

Semiconductors

Market Cap

$ 737M

Beta

1.55

Analyst Sentiment

10/12 -List Buy/Outperform (Bullish)

The company is a fabless semiconductor company that designs, develops and markets baseband processor solutions for the wireless communications market. The firm’s one-year operating margin is 19.95%. SPRD’s debt/equity ratio is 0.02.

As usual, we hope this help investors as they do their own due diligence on small cap companies with strong operating margins and low debt/equity ratios.

Source: 10 Small Cap Companies With Strong Profitability That May Dodge the Debt Downgrade