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Small-Cap Stocks With Large Growth Potential

Chris Mydlo

Chris Mydlo

31 followers

While monitoring the 52-week lows at GuruFocus, I found LKQ Corp (LKQ). The company has strong fundamentals and has been consistently growing its earnings at an annual rate of 20-30 percent for at least the past ten years. The company is a large provider of auto parts to collision shops, and its stock has done quite well. It is still a good value when comparing its growth rate to its P/E ratio of 24. As I took a look at the chart, I saw that the stock is up 1,094 percent in the past ten years. That leads to the question, “How can I find another stock similar to this one before an exponential move up?” The stock is currently a mid-cap with a market cap of 7.9 billion. The first step is to look for the small cap stocks before they reach a mid to large size. A few characteristics that stood out to me were its strong ratings for Financial Strength and Profitability & Growth, scoring 8’s in both categories. Looking at the past ten years of financial data, the company was able grow at a fast rate while the stock’s P/E stayed below 35 before its price acceleration to the upside. Using that information, I used the GuruFocus All-In-One Screener to search for the following criteria:

Market Cap: Maximum of $1 billion

Financial Strength: Minimum of 8

Profitability: Minimum of 8

P/E: Maximum of 36

EPS Growth Rate 1Y: Minimum of 25%

It was interesting to see that only 17 stocks met the criteria. I further narrowed down the list to 6 stocks while analyzing the earnings trends for consistent growth. Here are the final results:

The Gorman-Rupp Company (GRC)

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Gorman-Rupp was incorporated in Ohio in 1934 and designs, manufactures and globally sells pumps and pump systems for use in water, wastewater, construction, dewatering, industrial, petroleum, original equipment, agriculture, fire protection, HVAC, military and other liquid-handling applications. The company has a market cap of $758.7 million and a P/E of 22.20. It has no long-term debt and scores a 9/10 for Financial Strength. Its strong balance sheet allows the company to grow through acquisitions if needed. The company scores an 8/10 for Profitability & Growth with revenue and earnings per share growing at annual rates of 10.43 and 11.34 percent over the past five years. It has also increased its dividend every year for the past 41 years.

Chase Corporation (CCF)

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Chase is headquartered in Bridgewater, Massachusetts and was founded in 1946. It is a leading manufacturer of protective materials for high reliability applications. Its markets include wire and cable materials, construction products, electronic coatings, and custom products. The company has a market cap of $305.5 million and a P/E of 12. It scores an 8/10 for Financial Strength. Debt was added to the balance sheet in 2012 to help fund the acquisition of NEPTCO. The debt has been going down since and is now at $53.6 million. There is enough operating income to cover the interest payments over 20 times, keeping the balance sheet strong. Chase also scores an 8/10 for Profitability and Growth. Revenue and earnings per share have been growing at annual rates of 20.55 and 17.29 percent for the past five years.

Chase Corp will also display in the results of the Buffett-Munger Screener that is accessible at GuruFocus. The “Buffett-Munger Screener Top 25” has outperformed the S&P 500 by 19.77 percent since its inception in 2009.

Winmark Corp (WINA)

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Winmark is headquartered in Minneapolis and was founded in 1988. It is a franchisor of five value-oriented retail store concepts that buy, sell, trade and cosign merchandise. Each retail store brand emphasizes consumer value by offering high-quality used merchandise at substantial savings. The five brands are Plato’s Closet, Once Upon A Child, Play It Again Sports, Music Go Round, and Style Encore. In a largely segmented second-hand market, there is plenty of room for growth. The company has a market cap of $331.3 million and a P/E of 18.4. It scores a 9/10 for Financial Strength with only $150,000 in long-term debt and a cash balance of $24 million. Winmark scores an 8/10 for Profitability & Growth and has been increasing revenue and earnings per shares at annual rates of 11.24 and 28.72 percent over the past five years.

Logistec Corporation (TSX:LGT.B, LTKBF)

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Logistec was founded in 1952 and is headquartered in Montreal. The stock’s primary exchange is in Toronto, and it trades over-the-counter in the United States. It has a market cap of $426.9 million and a P/E of 16.30. The company operates in marine services and environmental services. The marine services division operates dry cargo terminals at ports mostly along the eastern seaboard of North American. The environmental service division is where the growth is and is also expanding into Europe. Some of the services include repairing drinking water pipes and woven hose manufacturing for aqueduct rehabilitation services. Last year Logistec launched a new product for the shale gas industry.

The company has a market cap of $426.9 million and a P/E of 16.30. It scores an 8/10 for Financial Strength and has very little debt. The operating income is enough to pay its interest expenses nearly 73 times. Logistec also scores an 8/10 for Profitability & Growth. Revenue per share has been increasing at a rate of 8.74 percent over the past 5 years, but earnings per share has been increasing at an annual rate of 28.66 percent. The company has been becoming more efficient and increasing margins.

Anika Therapeutics Inc (ANIK)

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Anika Therapeutics was founded in 1983 and is headquartered in Bedford, Massachusetts. It has a market cap of $590 million and a P/E of 19.20. The company develops, manufactures, and commercializes therapeutic products for tissue protection, healing, and repair in the United States, Europe, and internationally. The company scores an 8/10 for Financial Strength and has no debt on its balance sheet. It ranks a 9/10 for Profitability & Growth. Revenue and earnings per share have been increasing at annual rates of 10.01 and 47.38 percent over the past five years. Anika Therapeutics has also been becoming more efficient and increasing its margins.

u-Blox Holding AG (XSWX:UBXN, UBLXF)

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The company is headquartered in Thalwil, Switzerland and was spun off from the Swiss Federal Institute of Technology in Zurich in 1997. The stock’s primary exchange is the SIX Swiss Exchange, and it trades over-the-counter in the United States. It has a market cap of $936 million and a P/E of 32.40. u-Blox is a fabless semiconductor provider of embedded position and wireless communication solutions. Using the fabless business model means that the company designs the semiconductors and outsources the production. The model leads to higher margins and little need for capital expenditures. While Garmin (GMRN) is mainly in the consumer market for GPS, a majority of u-Blox’s revenues come from industrial customers. More than 4,500 companies rely on its unique solutions to locate and communicate their exact position in cars, trucks, containers, personal navigation devices, PCs and mobile phones. The company has no long-term debt and scores an 8/10 for Financial Strength. It also scores an 8/10 for Profitability & Growth. Revenue and earnings per share have been increasing at annual rates of 32.96 and 57.76 percent over the past five years. This stock is my favorite of the bunch with its strong growth and potential for its market as more products become wired and start to communicate with each other.

Conclusion

These stocks have potential to be the next ten-baggers. Using LKQ Corp as a model, GuruFocus’ website allowed me to quickly look at its past 10 years of financials on one page. I was also able to get a quick view of LKQ’s historic P/E ratios by using the interactive chart feature, and the Financial Strength and Profitability & Growth scores helped make my search easier for similar companies. You can tie it all together and let the All-In-One Screener find the stocks for you. The tools available on the site can help you research and develop your ideas and possibly find the next 10-bagger. It will be interesting to see where these stocks will be in the next five to ten years.


Rating: 4.0/5 (2 votes)

Voters:

Comments

reddyrm
Reddyrm premium member - 1 month ago

Very nice work. Thank you

reddyrm
Reddyrm premium member - 1 month ago

To analyze consistent growth, just curious how did you arrive at these 6 of 17. Can you explain ?

Thanks

chris mydlo
Chris mydlo premium member - 1 month ago

Thanks, Reddyrm.

Some companies had erratic earnings, that were not consistently growing. Spindletop's move looked like it was tied to oil prices. I also kicked out the companies that were making a penny or two per share. When dealing with pennies per share, there will likely be big rounding errors.

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