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Top Small Caps with Solid Fundamentals and Strong Sentiment

Carlos DiezCarlos Diez

Adventurous investors looking for outsized returns spend a good deal of their time looking for stocks in the small cap space. While smart stock selection can indeed result in significant gains, the risks are also considerable and investors buying small caps, particularly in a market as nervous as the current one, should keep a close eye on their stocks. Understanding, or at least following, the qualitative story is very important, particularly as many of the most promising small caps belong in sectors such as technology and health care where product innovation, regulatory changes and litigation, only to name a few, carry consequences to which smaller companies are more sensitive than bigger ones. While reporting companies’ qualitative story isn’t MarketGrader’s strength, we do believe that beginning your research process with a solid group of well run, profitable candidates can get you off to a good start. Below we list the top five Small Caps in MarketGrader based on a combination of solid fundamentals and strong sentiment. These companies are part of our Small Cap Honor Roll, which you may view here.

DepoMed Inc. (DEPO)

With an overall grade of 93.6 (out of 100), DEPO is the highest graded pharmaceutical company in The company has a market capitalization of $422 million and, it should be said, faces significant headwinds on a number of fronts. Its diabetes drug Glumetza is facing a patent challenge from Sun Pharmaceuticals while its partner, Abbott Labs, has declined to market its new drug Gralise, despite FDA approval. Despite a three month decline of 15% in the price of the stock, most investors seem to be sticking around, as evidenced by our strong Sentiment score of 8.3 (out of 10). MarketGrader’s Sentiment analysis is based on four indicators designed to measure, well, investor sentiment for the stock, irrespective of the company’s fundamentals (RIMM’s Sentiment score, for example, fell from 8.1 in early April to 1.7 in the days before last week’s earnings announcement, which sent the stock tumbling more than 20% in a day).

As indicated by our fundamental grade, DepoMed’s financials are solid, in large part because it posted very strong results for the quarter ended March 31st. It generated $86.7 million in free cash flow during the last 12 months, on revenues of $149.8 million. The company has been paring its debt load aggressively, with total debt outstanding of just $1.16 million, down 86% from where it stood two years ago. The stock is currently trading at 3.9 times trailing 12-month earnings per share and 4.8 times forward full year earnings. The company’s return on equity in the last 12 months was 85%.

Kulicke and Soffa Industries Inc. (KLIC)

Singapore-based KLIC, which manufactures equipment for the Semiconductor industry, is one of a few highly graded companies by MarketGrader in the sector. It has an overall grade of 93.5, a Sentiment score of 8.6 and a market capitalization of $785 million. The company has cut its debt by 59% in the last two years to $101.75 million, which now accounts for just 21% of total capital. Kulicke and Soffa generated $138.45 million of free cash flow during the last 12 months on revenues of $836.12 million, with a return on equity of 41.3%. Revenues are now 40% higher than they were three years ago. During the last year the company’s margins expanded smartly, with operating margins of 21.17% compared to 8.7% for the 12 months ended a year ago. The stock is currently trading at 4.6 times trailing 12-month earnings per share and 5.7 times fiscal year 2011 estimates.

Republic Bancorp Inc. (RBCAA)

This Kentucky-based bank has a market capitalization of $367 million and the highest overall grade, at 90.3, of all banks in Its Sentiment score is 7.6. RBCAA, which has branches in Kentucky, Indiana, Ohio and Florida, has consistently increased its dividend yearly in the last five years and never had to cut it during the 2008 financial crisis. The bank, which has excellent financials, was highlighted on our Blog last month. During the last 12 months, ended last quarter, Republic Bancorp’s income resulted in a 2.78% return on over $3.6 billion on average quarterly assets, much higher than the average return on assets of 0.05% for all banks followed by MarketGrader. The bank’s capital position is very strong, with core capital accounting for 23.9% of risk-weighted assets, above the 12.7% bank average. Additionally, at the end of last quarter Republic Bancorp had $0.70 in loan loss reserves for every dollar of nonperforming assets. The stock is currently trading at 4.5 times trailing 12-month earnings and 5.4 times full year estimates.

Nova Measuring Instruments Ltd. (NVMI)

Another highly graded company in the semiconductor space, Israel-based NVMI has a MarketGrader overall grade of 90.2 and a Sentiment score of 8.9. It has a market capitalization of $267 million. The company’s revenues and net income have been growing at a healthy clip in recent quarters and it has no debt. It generated $27.38 million in free cash flow on a trailing 12-month basis, on revenues of $98.8 million, which were 72% higher than the 12 months ended three years ago. More importantly, Nova Measuring Instruments has been growing profitably, having grown its gross margin to 57.5% in the last 12 months from 50.6% a year earlier, while achieving a return on equity of 35%. The company’s shares currently trade at 9.3 times trailing earnings and 9 times full year estimates.

Momenta Pharmaceuticals Inc. (MNTA)

Momenta Pharmaceuticals, with a market capitalization of $978 million the highest graded biotechnology stock in, is another company investors should monitor closely. We give it an overall grade of 89.5 and a Sentiment score of 8.4. The company was losing money up until three quarters ago, when its growth exploded. Contrast its results for the 12 months ended last quarter to the equivalent period ended a year ago: revenues grew in this one-year period to $191.25 million from $19.95 million; a $62.19 million loss turned into $110.38 million of net income while free cash flow went from a negative $50.1 million to $39.93 million in the most recent period. The company has increased its common share base by 15% also during the last year. It has apparently used its capital and improved operating results to aggressively pay down debt, which went from $11.58 million in 2007 to $1.58 million at the end of the first quarter. It is also sitting on $182 million in cash and other short-term investments. Among things for investors to monitor will be its ongoing profit sharing agreement with Sandoz, part of Novartis, and its pending litigation with TEVA Pharmaceuticals, which Momenta sued for patent infringement last December.

Comments 1
  • james
    Posted on

    james james


    small cap isn’t my cup of tea. Go with the bigger fish & in 30 years.. you will be glad you did.