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5 Fast-Growing Small-Cap Stocks to Watch
Posted by: Jae Jun (IP Logged)
Date: March 26, 2013 05:34PM
This is a continuation of filtering through Forbes' Best Small Companies. I love to get ideas and learn about new companies from this list.
Although Forbes magazine is well circulated across the country, people are lazy and will not make the effort to go through the companies, so here’s your chance to go one up on most people.
First, here is a spreadsheet of the top 50 stocks I compiled a couple of months back. Download this spreadsheet of the top 50 Forbes stocks.
As a quick recap, here is the method Forbes used to compile this list.
5 stocks ranked 11-15 will be looked at today.
#11 IPG Photonics (IPGP)
IPG Photonics is a maker of fiber lasers which are used in a wide variety of industries for welding, cutting, drilling and etching. They is used across all industries which gives IPGP the potential to continue capitalizing on its market.
Here are some video demonstrations that will immediately help you understand what fiber lasers do.
Video of IPGP lasers in work
Video of Trumpf lasers in work
Last time around, I rated IPGP as a B+ stock.
Fundamentally, IPGP doesn't have many weaknesses. It is solid. The only concern is the valuation.
Valuing IPGP is difficult because the company has never been at a consistent level. From 2005 to 2009, IPGP was in growth and investing mode. It wasn’t until 2010 when the company started to really reap rewards and the growth has been huge since then.
Thus the difficulty in trying to come up with a fair value.
Discounted Cash Flow
FCF isn’t a good metric to use for IPGP because of the heavy investment during its growing phase. Capex in 2005, 2006 and 2007 was $16 million, $20 million and $34 million, respectively. Those are some big jumps.
For IPGP, owner earnings is the better number to use as it eliminates working capital and adds back items such as depreciation and deferred taxes that should not be included.
IPGP has also performed extremely well over the past 5 years compared to its history. It has achieved an organic 15.4% ROE coming from healthy margin increases. See the DuPont analysis to see how it is calculated and download the spreadsheet too.
Using a discount rate of 12% and a growth rate of 16%, I get a value of $70.
Analysts are predicting an EPS of $3.16.
Using the Ben Graham formula, I get a value of $83.
Katsenelson PE Valuation
The current PE of 23 assumes that IPGP has an expected growth rate of 25%.
I believe this is too high so I’ve made an adjustment by entering the starting PE to equal 20% earnings growth which has been the historical growth rate.
This gives a fair value of $70.
If this is confusing to you, don’t worry. I’ve written a detailed step by step tutorial on the Katsenelson valuation model.
This gives a valuation range of between $70 and $83 based on the assumption that IPGP can continue its growth of at least 16% going forward.
If the company is unable to achieve such growth, then expect a hair cut on the stock price, which is what I will wait for.
Download the one page dashboard PDF of IPGP.
#12 United Therapeutics (UTHR)United Therapeutics is a biotech company that focuses on developing drugs for small niches with unmet needs. Their main drug targets a high blood pressure disease between the heart and lungs. The disease occurs in young woman with an estimated 30,000 being treated in the United States.
It’s a small market and because of the unfulfilled needs, the pricing power is astronomically high.
I am going to admit that I don’t know how to value UTHR.
The company has experienced huge growth but there are some signs of slowing down. What’s more, for the growth, the finance ratios also fall into value territory.
Check out some of these numbers:
Download the one page dashboard PDF of UTHR.
#13 Air Methods (AIRM)Air Methods is the largest provider in the air medical transportation industry. It’s a good business. People need emergency transport services and if you live in a rural area, you need air transport to quickly get you to a hospital.
The business is not easy to replicate either. You need a fleet or helicopters, national network of bases and pilots and trained medical staff.
Like United Therapeutics, you can see why Air Methods business is consistent and recession proof.
Some numbers to get you interested.
If I adjust the equity multiplier in 2010 from 3.73 to a normal value of 2.6, the ROE drops to 21.6%. Still good, but it is much lower than 31% showing that ROE is likely inflated at the moment.
Download the PDF dashboard for AIRM.
#14 Allegiant Travel (ALGT)Allegiant Travel is the only airline I would be willing to own. ALGT operates a low-cost passenger airline marketed to leisure travelers in small cities.
For now, I will chalk it up as another investment miss.
I wrote about ALGT back in early 2012 and the business has continued to operate superbly.
I highly recommend you to read the article to get a better understanding of how they are different to other airlines.
Download the PDF dashboard for AIRM.
Although ALGT is profitable, cash flows are still inconsistent which means a DCF is going to be difficult.
With a projected EPS of $5.18 and growth rate of 11%, the Graham valuation shows a fair value of $121.
With ALGT trading at a premium, the absolute PE valuation model shows that ALGT can go as high up as $110 with a fair value PE of 27.
Here is another range of values using utilizing an EBIT multiple calculator.
Looks like the current price points towards a slight over valuation and nearing towards the aggressive assumptions.
Download the PDF dashboard for Allegiant Travel.
#15 Syntel (SYNT)Finding Syntel is a pleasant surprise. The business centers on outsourcing their skills to global companies as opposed to outsourcing staff to companies which is a much lower margin business.
In a nutshell, Syntel will develop custom software applications according to a customers specifications related to their business.
There are plenty of these companies all around the world, but it is surprising to see how Syntel has achieved such success in such a competitive field.
With such strong fundamentals and exponential growth to date, how do you go about valuing a company like SYNT?
It obviously has excellent numbers but would I confident in assigning a growth rate of around 20% going forward?
If I’m going to assume an aggressive case of 20% growth, then the valuation I get is around $130 using the DCF method, $136 using the Graham formula and $100 with the Absolute PE method.
That’s about a 80 – 100% upside from current prices.
Other competitors are of lower quality but priced higher, so if you do a relative valuation, the fair value is around $80.
Doing an EBIT valuation which only looks at a maximum of one year going forward, the valuation range is between $32 to $72.
That’s a wide valuation range, and at this point, I’d rather keep an eye on it to see what a normal operating business level is as opposed to riding the wave up not knowing when it is going to end.
That goes for the rest of the stocks mentioned here. High flying companies that are operating at its peak so there could be a chance that it will come down at which point it would be a very compelling investment opportunity.
Stocks Discussed: IPGP, UTHR, AIRM, ALGT, SYNT,