Companies that continue to grow earnings at a good clip and are still cheap at the current earnings multiple offer investors a unique opportunity to buy growth at a reasonable price. While future growth cannot be guaranteed, low valuation can often add a good margin of safety should the projected growth not materialize.
The following stocks all have PE ratios below 15, have grown EPS in the last 3 years at > 20% and are projected to have a healthy EPS growth going forward for the next 5 years. These companies also have ttm profit margin better than 15%. I have also narrowed down to the companies with market value between 50 million and 1 billion. These are some of the best quality small cap stocks to buy now for their future earnings growth.
- LTX-Credence (LTXC): LTX-Credence is a semiconductor test equipment manufacturer and servicer serving wireless, computing, automotive and consumer markets. The stock can be purchased at a trailing PE ratio of 5.46. With a market value of $322 million and a cash holding of $162.62 million and no debt, LTXC’s balance sheet is plenty strong. The next few quarters are uncertain as their chip maker customers are forecasting weak demand that may result in losses for the next couple of quarters. At this time, I believe that the stock already reflects the projected weakness and as the industry rebounds the company will be back on its growth path.
- DG Fastchannel (DGIT): DG Fastchannel operates advertisement and content distribution networks that connects advertisers, broadcasters, online publishers and other media outlets. DGIT also delivers political advertising during election campaigns and provides a response mechanism for candidates and issue groups. With $538 million in market value the company currently trades at a 11.72 Price to Earnings ratio. Past 5 years EPS growth were better than 30%, with next 5 years estimated at 26% giving the company a PEG ratio of 0.47.
- Incredimail (MAIL): Incredimail is an Israel-based software company that sells the popular Incredimail email software. It also offers a free download of the email software which is monetized by displaying ads. The company has generated 44% EPS growth in the past 5 years and is projecting another double digit growth the next year. At a PE ratio of 5.78, the company is cheap. The company had around $31 million in cash on the books, of which it has used up $25 million in acquiring SmileBox recently with further $15 million in cash payments still to be made pursuant to hitting certain milestones. If Smilebox gets accretive to the earnings fast, the company will likely grow much faster than the current projections suggest.
- GSI Technology (GSIT): GSI Technology designs and makes static random access memory for router and networking applications. The company has $140 million market value, no debt and about $60 million in cash on hand. The stock currently trades at 8.23 Price to Earnings ratio. The company has averaged 30% growth rate in the past 5 years. Although the general slowdown in tech sector means that its next year results will be impacted, it has sufficient balance sheet strength to ride it out and regain its growth path.
- Integrated Silicon Solution (ISSI): ISSI is another memory chip designer and marketer. It is a fabless semiconductor company so it outsources its manufacturing. The market currently values the company at $283 million ascribing a PE ratio of 4.75. The company has delivered an EPS growth of 39% in the last 5 years and its future outlook appears to be of modest growth as well, with a slight decline in the up coming year. The company has $88 million in cash and no debt and is well positioned to handle the slowdown in demand next year.
- Revlon (REV): Revlon stock has had a checkered history and spent a large part of 2009 in the $2 range. The company however seems to have found its mojo. The current market value of $761 million the company sports a trailing PE of 2.45. However, taking away the effect of one time tax benefits, the PE is actually close to 11. The company is projected to grow EPS by 32% next year. Be wary of the high debt and negative book value though.
- Oplink Communications (OPLK): Another semiconductor company in this list, Oplink designs, manufactures and sells optical networking equipment. Market value is $343 million and the OPLK stock currently trades at 8.35 PE. The company has grown its EPS at 20% clip in the past 5 years and next 5 year growth rate is estimated to be 26%. It has $173 million in cash on books and no debt.
- Telular Corp (WRLS): Telular provides wireless connectivity solutions to home alarm and industrial segments for monitoring, security and data applications. The $89 million market value company currently can be bought at 2.42 PE ratio and offers a 6.8% dividend yield. The company reported a revenue growth of 16.6% in the latest quarter and is expected to grow earnings 16.7% this year and 43% the next. The company does not have analyst following so a deeper due diligence is advised.
So there you have it, 8 companies with cheap valuation that are expected to grow their earnings at a rapid clip. As always, do your own due diligence before committing any capital to these stocks.
Discosure: I do not own or plan to buy any of the stocks mentioned above in the next 72 hours.