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Last week I decided to start going through a list of 200 small companies determined to be fast growers in 2009. Two years later the growers have succeeded in returning shareholders with impressive equity returns, while the laggers now find themselves in a down cycle.

The order in which I’m going through the companies is a simple ratio of the current price divided by the 2009 price. The lower the ratio, the more the stock has fallen in two years.

My Process of Filtering the List

I’m not doing anything complex. I load the company up onto the stock valuation program because it is much too early to be digging the SEC archives for past 10 years of data.

I then quickly go through each of the financial statements, taking note of the margins, growth in shareholders equity, debt and share count. I then glance at the FCF / owner earnings numbers to determine how well the company is run.

This quick rundown through the financial statements allows me to identify whether a company is a good candidate. If so, I move onto looking at specific metrics that I like (I’ve previously listed the best 15 financial ratios). These ratios help me to understand whether the strength of the company and to get a better picture on whether the odds of the stock being a value trap.

If I want to value a particular stock, I’ll use the DCF, Graham formula, EPV, absolute PE, as well as a EBIT multiple calculation. I have all this set up, so it really only takes me about 3 minutes to get a valuation using all 5 methods.

20 Stocks and Going Strong

I’m only going to list the first 20. My commentary on each stock below will be concise and to the point. Feel free to disagree. There have been discussions up in the forum as well. If you don’t like this short list format, leave a comment and I can write in more detail on the ones that I plan to do further research on.

Books-A-Million (NASDAQ:BAMM): Previous holding of mine. Selling for less than book value. Company cannot make more than cost of capital to grow. Operations were flat, but now it has produced losses. Big family ownership but the trend of the industry makes BAMM a value trap. Intrinsic value will come down to meet price.

Citi Trends (NASDAQ:CTRN): Retailer of urban fashion. Pretty sure there are competitors that are better investments.

Tekelec (NASDAQ:TKLC): telecom network solutions company. No moat. EPV is less than Repr. NCAV makes up 50%. Intrinsic value doesn’t rise. Asset play at best.

Capella Education Company (NASDAQ:CPLA): Dependent on favorable budgets from government for education sector. Is CPLA one of those affected?
Buying back stock, no LT debt, strong balance sheet, increasing FCF without much divergence from owner earnings is a good sign. EPV = 2x Repr. Moat.

Strayer Education (NASDAQ:STRA): Much like CPLA, it has fallen a lot since 2009 when it looked way overvalued. How much of STRA is dependent on government funding? Cash converting machine. Greater than 30% CROIC. Moat of EPV/Repr = 100/30 = 3

Lincoln Educational Services (NASDAQ:LINC): For profit education company. Much the same as CPLA, STRA. Margins are more stable than the others. Is TTM figure reliable or will it be affected even more? Past 2 year CROIC above 15%. Doesn’t look sustainable based on history.

Energy Recovery Inc. (NASDAQ:ERII): Short history. BIG drop in margins.Strong balance sheet though (how was the balance sheet financed? Equity dilution?) Very low CROIC. Not worth it.

Bovie Medical (NYSEMKT:BVX): Small medical device company. FCF shows history of losses. Immediate pass.

Bio-Reference Laboratories (NASDAQ:BRLI): very good financials. All margins consistent for 10 years. But what is the growth driver? No moat business. Looks fairly priced at this level. Good CROIC, ROA, ROE.

Almost Family (NASDAQ:AFAM): Recently hit by Obama healthcare. Good FCF, reduced debt in past 2 years. Very strong recent 5 year growth.

PetMed Express (NASDAQ:PETS): Pet pharmacy with a very strong balance sheet, but latest year seeing difficult results. Buying back a lot of shares and paying 5% dividend. Margins decreasing for 4 years and will be 5th year of decline = eroding moat. EBIT will likely be 12%

LHC Group (NASDAQ:LHCG): Home healthcare company, similar to AFAM. Good numbers but dependent on government whims.

NCI, Inc. (NCIT): A provider of information technology, engineering, logistics, and professional services and solutions to Federal Government agencies. Stay away from anything that is too connected to government. The company's spending is based on budgets. Decreasing margins, big jump in TTM debt.

Nutrisystem (NASDAQ:NTRI): Gross margins have been consistent but net margin in decline as well as FCF. No moat biz and a discretionary item. Could be a turnaround company but not counting on it. If business keeps declining, fair value looks to be at about $10.

DG FastChannel (NASDAQ:DGIT): Good FCF, increasing CROIC in the past year and operations all around. Company looks to have turned around since 2009. Current price is close to no growth value. Can the company earn better returns than the cost of capital? P/FCF is 6-7, which is cheap.

Dolby Laboratories (NYSE:DLB): Excluded from Windows 8 caused 30-40% drop. Everything else is good. Management has a big stake, numbers are excellent, growth is slowing because of drops in PC sales, but other audio channels such as content boxes are available. Conservative estimates put DLB at the lower range of valuation at current prices. If Windows 8 drop was overdone, fair price should be $40.

Rochester Medical Corp (NASDAQ:ROCM): Good revenue growth and margins, but can't convert it down to bottom line. Tell tale of weak management and competitive pressures as expenses are high in order to make sales.

Sterling Construction Company (NASDAQ:STRL): Issues debt and equity financing to get money. Thin margins in contracting and consulting business. MRQ shows big drop in cash as well. Nothing entirely impressive. Mediocre company.

TESSCO Technologies (NASDAQ:TESS): 1.-2% net margin. Razor thin. Margins currently at the low range. If it increases slightly valuation can go up, but it's difficult with the business model. Debt is constantly increasing. Doesn't decrease. Capital structure doesn’t look very good.

II-VI Incorporated (NASDAQ:IIVI): Doesn't look cheap in terms of metrics. P/FCF of 36, P/tangBV of 2.7 is not cheap. Margins are stable and look to be on the rise. Does work for government. According to spreadsheet, received a lot of income from “other cash flow”. Need to see where this comes from in more detail. EPV = Repr. No moat.

Disclosure: Long DLB

Source: Filtering 2009's Fastest Growing Small Companies: Thoughts On 20 Stocks