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Going through the list of Forbes Best Small Companies has become a tradition at Old School Value. Previously I announced that I was going through the 2009 list of 200 best small companies to get more ideas and to revisit many of the companies that I looked at. (You can see the original 2009 best small companies series here.)

Two years after my first run, 20 companies have been eliminated from the list. Most of them were bought out or went private. There were a few I deleted because they were just plain awful and not even worth putting in the list. From a percentage perspective, roughly 7.5% of the companies were bought out or taken private. You would have been rewarded with some concrete gains if you held some.

The Process
Because I had so many companies to go through, I had to keep the process simple and quick. I either liked it or disliked it within 5 minutes of looking at the financial statements and most of my favorite financial ratios. I didn’t have time to decipher what the hidden assets were or break down the components of the business operations.

At first, the method was uneven and inconsistent and it is likely reflected in the comments for each stock, but as I continued, it got simpler and clearer. Here is how I went through the companies:

  • I used my stock valuation spreadsheets to value stocks. No time to calculate everything by hand when you are going through 200 stocks.
  • Start going through the financial statements in reverse. From the cash flow statement to balance sheet to income statement.
  • (if you want to build confidence in interpreting financial statements, start with this series. Income statement analysis. Balance sheet analysis. Cash flow statement analysis.)
  • Review the financial statements in percentage form. That way you get a better picture of the state of the company.
  • Then look at historical 10 year trends of the best investing ratios.
  • Value the stock based on low, mid and high expectations to get a range of values. DCF valuation, Graham formula, EPV and absolute PE methods were mainly used.
  • Each company was then given a rank of 1,2 or 3 based on current price to calculated intrinsic value and quantitative fundamentals of the business.

Data Explanations
Like I said, it got easier as the list went on, because once I found a pattern of things to look for, I could do it much more quickly than at the beginning. You can download the spreadsheet as well as the pdf of my results, but let me explain the meaning of the headings.

  • Date of completion for this project: Nov. 21, 2011
  • % Price change: The price change in % on Nov. 21, 2011
  • Price in 2009: The price of the company when I first reviewed it in 2009
  • Current price: Price as of Nov. 21, 2011
  • 2011/2009 Price: Dividing the current price to the 2009 price to see how much the stock price moved from the 2009 value.
  • Added Price: The trading stock price when I got around to analyzing that particular company and added it to the list.
  • Price Diff%: The difference in price from the time I analyzed and added it to the list.
  • Low – High Value: Intrinsic value range calculated with the stock valuation tools.
  • Low – Mid Sale%: The % value between the trading stock price and the calculated intrinsic value.
  • Price (1,2,3): Rank given to the company based on intrinsic value and stock price.
  • Biz (1,2,3): The quality of the business based on quantitative data.

Quality Companies Worthy of Mention
Here is a list of companies I found to be particularly interesting and worthy of studying in more detail. (Comments may be a couple of weeks old, based on the time I analyzed each one.)

National Presto Industries (NPK): Accounting is very straight. Easy to understand. Business has greatly improved since 2006-2007. Getting towards high operating efficiency. Did well even in recession and current year. Good margins. Large increase in receivables and inventory from 2006-2007 looks to have been solved now. Solvent with no short term or long term debt. Retained earnings and shareholders equity has increased for 10 straight years. Annual dividend of 8%. Valuation looks excellent.

Comtech (CMTL): Made money in recession, and revenue growth is still impressive at 30% last year. Most likely due to an acquisition in 2009-2010. Increase in growth has led to inefficiency showing margin decrease. Net margin has taken a big drop. If company can get back up to upper range of margins, intrinsic value will be much higher. Share count has increased. Warning is that revenue grew 30% but receivables grew 70% in 2010. Even with 15% discount rate and 10% growth off conservative FCF, valuation is compelling. 5year CROIC is 12% and 5 year FCF/Sales is 13%. Cash converting cow. NCAV of $16.7 and NNWC of $14.5. Meaning business is being priced for about $10.

NVE Corp (NVEC): Makes devices that use spintronics, a nanotechnology for transmitting data. Small company with FCF growth every year. See what’s listed under sale of assets. Not much cash. Hasn’t had much cash in its history of operations. Shares are not diluted. Company has grown significantly since the beginning. Returns on capital are excellent at > 19%. Not cheap in terms of multiples. EPV is 2x net repro suggesting that a moat does exist.

Hittite Microwave (HITT): Makes integrated circuits, modules and other RF parts. Excellent growth on the top and bottom line. FCF growth is most impressive. Huge margins considering the industry. Must have an excellent moat. Watch the receivables growth. Lots of cash, no debt, no intangibles. First small acquisition in 10 years. Amazingly good fundamentals. ROE at 20%. CROIC at 15%.

FactSet Research Systems (FDS): Provides financial fundamental data and financial tools. Very profitable business. Huge margins. No debt, plenty of FCF. Latest ROE, ROIC, CROIC is ASTRONIMCAL at over 30%. If it ever comes down, buy, buy, buy. Definitely a moat.

Reven Industries (RAVN): Industrial manufacturer. Positive FCF for 10 years, no debt, no stock issuance, very small acquisitions (if you can call it that), plenty of cash, healthy balance sheet. Very low SG&A. Wonderful. Currently at its peak in margins. Stock price has gone up a lot to reflect the strong business. Industrial manufacturer with ROE, CROIC in 25% range since 2005? Definitely can continue to grow.

Hibbett (HIBB): A sporting goods store business that has managed to grow revenues in recession. Margins have increased and at all time highs. Conservative inventory growth and receivables. Looks like the company manages its working capital extremely well. No intangibles, debt is close to 0. 5yr ROE, ROIC, CROIC is 23% for a sports retailer. Amazing.

Download the 200 Best Small Companies List
Forbes 200-2009_20111121 – Excel (XLS) version
Forbes 200-2009_20111121 – PDF version

For U.S. readers, have a safe and happy Thanksgiving. For the international crowd, look forward to the weekend.

Source: Forbes's 2009 'Best Small Companies' Revisited