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Jae Jun
Jae Jun
Articles (5983)  | Author's Website |

2009 Forbes 200 Best Small Companies (Part I): Lumber Liquidators, Allegiant Travel, Quality Systems, LHC Group Transcend Services, Rackspace Hosting, NVE, American Public Education

Value Investing Analysis for 2009 Forbes 200 Best Small Companies

It’s finally that time of year again where I go through 200 companies that made it to Forbes 200 Best Small Companies list.

There has been a big shuffle this year with 71 companies from last year falling out of the list. The requirement is that the company have annual revenue between $5 million and $750 million, be publicly traded for at least a year and have a stock price no lower than $5.

The one big issue I see with the Forbes list is that they refer to “best” as growth in sales which isn’t something value investing considers.

The Screening Filter

Since all the companies are supposedly growing and profitable, there are no net nets or other cheap stocks.

  • Immediately exclude financials (outside circle of competence)
  • Run the companies through the Old School Value investment spreadsheet with the PE as the growth rate, but capped at 15%. The selected companies shall exhibit;

    - Positive, consistent and growing cash flows.

    - Consistent margins. Fluctuating/decreasing margins over several years will not be accepted unless the other criterias are outstanding. Above average returns from capital investments (CROIC, ROE, ROA)

    - Strong balance sheet

  • Companies should have at least 5 years of operating history

The List of Companies

I’ll only be going through and commenting on each of the first 10 companies in this initial post. Future posts will only discuss fundamentally good companies.

1. Lumber Liquidators (NYSE:LL)

Specialty retailer of hardwood flooring.

Too short history but the company makes good FCF and excellent CROIC. Looks to be trading a big premium with the growth it has exhibited but a company to keep an eye on should prices fall one day.

DCF Calculation: $14.31

Graham Formula Calculation: $11.32

EPV: $12.71

2. Allegiant Travel (NASDAQ:ALGT)

Operates a low-cost airline serving resort locales such as Las Vegas and Orlando.

Never liked airline companies. Top line may have increased but bottom line is still weak with barely any FCF consistency or growth.

DCF Calculation: $14

Graham Formula Calculation: $18.71


3. Quality Systems (NASDAQ:QSII)

Creates software designed to automate and streamline administrative functions required for operating a medical or dental practices. My previous analysis of QSII showed how much I was wrong. My intrinsic value estimate was between $22-$36 while it is now trading at $63. QSII continues to grow at an amazing pace on both the top and bottom line.

  • Awesome FCF generation, CROIC, ROA, ROE with zero long term debt
  • It’s growing at such a fast organic rate that I feel uncomfortable in trying to value the company as I have no way of knowing how long this growth will continue.


Provides post-acute health care services to patients through its home nursing agencies, hospices and long-term acute care hospitals.

Big drop in tangible shareholders equityExcellent CROICExcellent FCF growthMargins are volatile yoy but increasing trend

[b]DCF Calculation
: $33

Graham Formula Calculation: $28.14

EPV: $25.81

5. Green Mountain Coffee Roasters (NASDAQ:GMCR)

Sells over 100 whole bean and ground coffee selections, hot cocoa, teas and coffees in K-Cup portion packs, Keurig single-cup brewers and other accessories.The Keurig single-cup brewers may be selling like hotcakes but I still don’t see how it could be worth $73 as the market implies. A pure growth stock. I do not see fundamentals supporting it at all.

DCF Calculation:$4

Graham Formula Calculation: $10.19 (even with a 20% growth rate!)

EPV: $17.76

6. Transcend Services (TRCR)

Provides medical transcription services to the healthcare industry.

  • FCF fluctuating. No growth.
  • Not a consistent performer
  • Past 4 years has seen dramatic growth

DCF Calculation:$12.20

Graham Formula Calculation: $10.33

EPV: $7.26

7. Rackspace Hosting (NYSE:RAX)

Business of hosting and cloud computing.

Maybe I should switch my value investing blog to Rackspace.. hmm

  • IPO’d last year
  • Huge growth in customers, especially in the cloud computing area
  • Another big growth stock in a growing industry/sector
  • Not enough history and results to offer any reliable valuations


Develops and sells devices that use spintronics, a nanotechnology that relies on electron spin rather than electron charge to acquire, store and transmit information.

  • Small company so the growth has been huge. Organically fast growing company.
  • FCF growth huge
  • CROIC is excellent as well
  • Tangible shareholders equity has been increasing at an incredible rate
  • Margins increasing at impressive rate

DCF Calculation:$37.45

Graham Formula Calculation: $24.67

EPV: $23.66

9. American Public Education (NASDAQ:APEI)

Provider of online postsecondary education directed at the needs of the military and public service communities.

  • Short history to conclude but past 2 years has seen big improvements
  • Big FCF growth past 2-3 years
  • Tangible shareholders equity increasing
  • Issued lots of stock in 2007
  • No long term debt
  • Growing cash position
  • Big increase in margins

DCF Calculation:$15.55

Graham Formula Calculation: In the $7-8 range

EPV: $17.49

10. American Science & Engineering (NASDAQ:ASEI)

Develops, manufactures, markets, and sells X-ray inspection and other detection solutions for homeland security and other targeted markets.

  • Growing cash balance
  • Strong fundamental numbers
  • FCF growth excellent at 33%
  • CROIC is 13%
  • Conversion from Sales to FCF is at 12%
  • Cash from operations growth shows big increases
  • Seems to be cyclical every 3 years

DCF Calculation:$62.49

Graham Formula Calculation: $70.01

EPV: $56


The first 10 companies all fall into the growth stock category. As a value investor, I wouldn’t be placing any bets with these companies just yet. Some look to be selling for much too high a premium.

I do like ASEI as it looks to have a solid balance sheet and is able to convert its top line to the bottom.

Look out for the next set of Forbes Best Small Companies.

Disclosure: No positions in any stocks mentioned.

Jae Jun

Old School Value

About the author:

Jae Jun
Jae Jun is the author of Old School Value, a value investing blog dedicated to the Old School methodologies and teachings of the investment greats such as Graham, Buffett and Fisher. The blog deals with finding intrinsic value, fundamental stock analysis and special situations including spinoffs and merger arbitrage.

Visit Jae Jun's Website

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