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Magic Diligence
Magic Diligence

4 Attractive Small-Cap Growth + Value Stocks You Have Never Heard Of

April 16, 2014 | About:

If you're like me, your stock news feed is dominated by a few large companies, usually in the tech space.

Apple (AAPL) is going to do this. Microsoft (MSFT) should do that. Amazon (AMZN) is planning to release a (fill in the blank) "killer".

And if you are unlucky enough to have Herbalife (HLF) in your watch list, your news feed will be quickly turned into the digital equivalent of a garbage dump!

We all know about these companies, and so do every mutual fund and hedge fund manager.

As individuals or small money managers, we can do best by following the Peter Lynch strategy of buying "growth-at-a-reasonable-price", or GARP, companies.

This works particularly well for smaller cap stocks of solid companies that are growing their sales and have a long runway to grow going forward. If you can group that with a bargain valuation today, the gains possible when you combine a growing company with an expanding valuation multiple are substantial!

Using the MagicDiligence Screener, I wanted to share 4 attractive small caps that seem to meet these criteria right now! Please note that these are only short capsule overviews, interested investors should do their diligence before considering a purchase.

Bio-Reference Laboratories (BRLI)

Bio-Reference is a clinical testing laboratory, the fourth largest in the U.S., focusing mainly on the large Northeastern U.S. market. Bio-Reference has had success focusing on some specific testing platforms not as well served by the big boys like Quest (DGX) or LabCorp (LH), such as sexually transmitted infections and rare genetic diseases, that they offer services for nationwide. This $755 million market cap firm has increased revenues at double-digit annual rates for the past 19 years, carries minimal debt, and sells at a forward P/E ratio of 11.6 (according to Morningstar). Despite Medicare reimbursement changes, the demographics are attractive here, and BRLI's specialty testing services gives them an edge over the two big firms, as well as making the company "acquisition bait".

PhotoMedex (PHMD)

PhotoMedex is a health device company, focusing mainly on skin care. Some of its products include the XTRAC laser system for treatment of psoriasis and vitiligo, Neova skin care lotions, Tricomin for thinning hair, and a number of others (see their website for a full list). PhotoMedex has a strong recent track record, with 5-year compound annual revenue growth of 45%, strong free cash flows, very little debt, and a cheap forward P/E of 12.7. Just a few months ago, PhotoMedex announced it will acquire laser eye surgery firm LCA Vision. While this is a big $106 million bite for this $282 million dollar company, LCA's 61 vision correction centers will be leveraged to perform laser skin care operations as well, increasing utilization and improving margins of that business going forward.

Patrick Industries (NASDAQ:PATK)

Patrick Industries manufactures decorative vinyl panels, paper and wood profile mouldings, countertops, cabinet doors and components, wood furniture, fiberglass and shower figures, and other component products for the recreational vehicle (RV; 72% of sales), manufactured housing (19%), and industrial (12%) markets. They are one of the few nationwide companies in this space, facing mainly local competition. The company's recent growth has been impressive, with a 3-year revenue CAGR of 29%, on the back of rebounding RV and housing markets and several shrewd acquisitions. The RV industry now has grown in 16 of the last 17 quarters, and continues to be attractive given America's demographic trends. Those looking for a way to play it might be interested in PATK, as its 13.2 forward P/E is more attractive than Thor (THO) or Winnebago (WGO). You also get the ongoing rebound in the housing market as a bonus.

Lifeway Foods (NASDAQ:LWAY)

Lifeway sells probiotic food products, its main offerings being Kelfir (a milk substitute), Lassi yogurts, a line of premium cheese and cream cheese, and others. Lifeway has a long track record of revenue growth, growing in each of the last 10 years at an average annual rate of nearly 21% as consumers continue to migrate to organic foods. Lifeway has a strong balance sheet (21% debt-to-equity), recently started paying a dividend (minuscule 0.6% yield), buys back shares, and trades almost 40% below its 52-week high. My biggest concern here is the company's pricing power, as its operating margin of 8.2% needs to improve substantially over the longer term for this to be a successful investment.

About the author:

Magic Diligence
Charlie Tian, Ph.D. - Founder of GuruFocus. You can now order his book Invest Like a Guru on Amazon.

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