Small-cap stocks can offer strong gains for investors, but only if they are willing to go a bit ahead of the curve, and take on an extra dose of risk. One way to minimize exposure when investing in small caps is to go after those that have strong sources of profitability, coupled with a high amount of liquidity. Companies with profits and substantial funding can not only continue on with what they are doing, but they can also accelerate their growth to achieve new heights and beat out the competition. Today, we focused on small-cap companies with these particular traits, and we arrived at a list of stocks that warrants more time and research.
The Current ratio is a liquidity ratio used to determine a company's financial health. The metric illustrates how easily a firm can pay back its short obligations all at once through current assets. A company that has a current ratio of one or less is generally a liquidity red flag. Now this doesn't mean the company will go bankrupt tomorrow, but it also doesn't bode well for the company, and may indicate that it could have an issue paying back upcoming obligations.
The Quick ratio measures a company's ability to use its cash or assets to extinguish its current liabilities immediately. Quick assets include assets that presumably can be converted to cash at close to their book values. A company with a Quick Ratio of less than 1 cannot pay back its current liabilities. The quick ratio is more conservative than the Current Ratio, because it excludes inventory from current assets, since some companies have difficulty turning their inventory into cash. If short-term obligations need to be paid off immediately, sometimes the current ratio would overestimate a company's short-term financial strength. In general, the higher the ratio, the greater the company's liquidity (i.e., the better able to meet current obligations using liquid assets).
Return on Equity [ROE] is one way to identify great potential names relative to profitability. This ratio illustrates the percentage return on shareholder equity. This metric also segments the company into operational efficiency, asset use efficiency, and financial leverage. Why does this matter? Simply put, it allows investors to get a real picture of how the company is generating these returns and helps identify parts of the company that may be underperforming.
The Operating Profit Margin is a profitability ratio that measures the effectiveness of the company's operating efficiency. This metric allows investors to see how much profit is left after all variable costs are covered. If the company's margin is increasing over time, this means that it's earning more per dollar of sales. Finding trends in the Operating Profit Margin helps investors identify companies that are improving profitability over time and managing the economic landscape better than competitors.
We first looked for small cap stocks. We then looked for companies that have strong liquidity (Current Ratio>2)(Quick Ratio>2). From here, we then looked for companies that have been able to maintain a sound level of profitability for shareholders (ROE [TTM]>30%)(1-year operating margin>15%). We did not screen out any sectors.
Do you think these small-cap stocks will continue to see such strong profitability? Use our list to help with your own analysis.
1) Buckle Inc. (BKE)
Buckle Inc. has a Current Ratio of 3.69, a Quick Ratio of 2.62, a Return on Equity of 40.42%, and a Operating Profit Margin of 22.36%. The short interest was 31.25% as of 08/13/2012. The Buckle, Inc. operates as a retailer of casual apparel, footwear, and accessories for young men and women in the continental United States. The company markets a selection of brand name casual apparel, including denims, other casual bottoms, tops, sportswear, outerwear, accessories, and footwear. It operates stores under the Buckle and The Buckle names primarily in regional shopping malls and lifestyle centers.
2) Computer Programs & Systems Inc. (CPSI)
|Industry:||Healthcare Information Services|
Computer Programs & Systems Inc. has a Current Ratio of 3.24, a Quick Ratio of 3.13, a Return on Equity of 46.45%, and a Operating Profit Margin of 22.40%. The short interest was 8.17% as of 08/13/2012. Computer Programs and Systems, Inc., a healthcare information technology company, designs, develops, markets, installs, and supports computerized information technology systems to small and midsize hospitals in the United States. Its enterprise-wide system automates the management of clinical and financial data across the primary functional areas of a hospital. The company offers services that enable customers to outsource certain data-related business processes in the areas of clinical care, revenue cycle management, cost control, and regulatory compliance.
3) Silicon Motion Technology Corp. (SIMO)
Silicon Motion Technology Corp. has a Current Ratio of 5.35, a Quick Ratio of 4.50, a Return on Equity of 35.82%, and a Operating Profit Margin of 20.48%. The short interest was 5.58% as of 08/13/2012. Silicon Motion Technology Corporation, a fabless semiconductor company, designs, develops, and supplies a portfolio of multimedia data processing, storage, and transfer solutions primarily for consumer electronics applications. The company offers a range of microcontrollers for use in NAND flash memory storage products, including flash memory cards, USB flash drives, and embedded flash and solid state drives. It also offers a range of multimedia SoCs comprising embedded graphics processors for embedded graphics applications in desktop and notebook personal computers, game consoles, work stations, and multimedia mobile phones. In addition, the company provides semiconductor solutions consisting of mobile television tuners and integrated tuner plus demodulator SoCs for mobile phones and other portable devices; and CDMA transceivers for CDMA 1x and EVDO modem solutions, as well as transceivers for LTE modem solutions.
4) Sturm, Ruger & Co. Inc. (RGR)
|Industry:||Aerospace/Defense Products & Services|
Sturm, Ruger & Co. Inc. has a Current Ratio of 3.32, a Quick Ratio of 3.13, a Return on Equity of 37.57%, and a Operating Profit Margin of 21.10%. The short interest was 35.75% as of 08/13/2012. Sturm, Ruger & Company, Inc. engages in the design, manufacture, and sale of firearms in the United States. It offers single-shot, autoloading, bolt-action, and sporting rifles; shotguns; rim fire autoloading and center fire autoloading pistols; and single-action and double-action revolvers. The company also manufactures and sells accessories and replacement parts for its firearms. In addition, it provides investment castings made from steel alloys directly or through manufacturers' representatives.
5) Cray Inc. (CRAY)
|Industry:||Diversified Computer Systems|
Cray Inc. has a Current Ratio of 3.06, a Quick Ratio of 2.20, a Return on Equity of 73.00%, and a Operating Profit Margin of 50.75%. The short interest was 3.54% as of 08/13/2012. Cray Inc., together with its subsidiaries, designs, develops, manufactures, markets, and services high-performance computing [HPC] systems, known as supercomputers. Its products comprise Cray XE6 system, a massively parallel processing system; Cray XE6m supercomputer that incorporates its Cray Gemini network; and Cray XK6 System, a hybrid supercomputer. The company's products also include Future Big Data Analytics solution, a massively multithreaded platform with a shared memory architecture that is suitable for tasks, such as pattern matching, complex searches, scenario development, behavioral prediction, anomaly identification, and graph analysis; and Cray Sonexion 1300, a storage and data management solution.
6) Taro Pharmaceutical Industries Ltd. (TARO)
|Industry:||Drug Manufacturers - Other|
Taro Pharmaceutical Industries Ltd. has a Current Ratio of 4.29, a Quick Ratio of 3.63, a Return on Equity of 40.75%, and a Operating Profit Margin of 47.68%. The short interest was 0.04% as of 08/13/2012. Taro Pharmaceutical Industries Ltd., a science-based pharmaceutical company, together with its subsidiaries, engages in the research, development, production, and marketing of pharmaceutical products primarily in the United States, Canada, and Israel. It offers prescription and over-the-counter [OTC] pharmaceutical products, focusing on primary areas comprising topical creams and ointments, liquids, capsules, and tablets principally in the dermatological and topical, cardiovascular, neuropsychiatric, and anti-inflammatory therapeutic categories. The company also develops and manufactures active pharmaceutical ingredients for use in its finished dosage form products.
7) Raven Industries Inc. (RAVN)
|Industry:||Printed Circuit Boards|
Raven Industries Inc. has a Current Ratio of 3.28, a Quick Ratio of 2.19, a Return on Equity of 30.73%, and a Operating Profit Margin of 20.24%. The short interest was 3.88% as of 08/13/2012. Raven Industries, Inc., together with its subsidiaries, manufactures various products for industrial, agricultural, energy, construction, and military/aerospace markets primarily in North America. It operates in four segments: Applied Technology, Engineered Films, Aerostar, and Electronic Systems. The Applied Technology segment designs, manufactures, sells, and services precision agriculture products and information management tools enabling growers to enhance farm yields.
*Company profiles were sourced from Google Finance and Yahoo Finance. Financial data was sourced from Finviz.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.