Looking for Value in Small-Cap Growth

 | Sep 28, 2012 | 9:30 AM EDT  | Comments
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Stock quotes in this article:

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I spent Thursday at the Craig-Hallum Alpha Select Conference in New York, a great forum for seeking great emerging-growth stories. Craig-Hallum's analyst staff does a great job of identifying intriguing growth names, so I consider the conference a must-do every year.

Being a GARP guy, I favor the names with real earnings, as opposed to the concept stories, and especially like the ones trading at or below a market multiple. Despite the summer rally that has extended into the fall, there are some exciting names that can still be bought at reasonable prices. (Because this is a small-cap conference, all these names should be considered higher-risk, higher-reward ideas.)

Here were my highlights from the conference:

Vertex Energy (VTNR) -- Recycling is a theme of mine lately, one of the more promising avenues in a "green and clean" sector licking its wounds from the carnage in solar, wind or biofuels (latest victim: GEVO). Vertex recycles industrial wastes, most importantly used motor oil. The company both collects motor oil that is delivers to re-refiners and produces its own feedstocks from used hydrocarbons. Vertex grew from $39 million in revenue in 2009 to $110 million last year, earning $0.39 a share. Despite spectacular growth, the company has only a $22 million market cap and is trading at 5x trailing EPS.  I can't give you an estimate for this year, because this undiscovered gem has no analyst coverage, but they have already done $65 million in revenue in the first half, so are at least on track for 10%-type growth for the year.

Hudson Technologies (HDSN) – Following the recycling theme, this Real Money "Long Shot" presented at the conference. Hudson recycles R-22 refrigerant and business is booming due to the implementation of EPA regulations restricting the supply of new R-22.

There are a few blasts from the past, hot names in the semiconductor space back in the 1990s, that are making comebacks. ChipMOS Technologies (IMOS) is a Taiwanese name that provides assembly and test services for various parts such as LCD drivers, memory, etc. They nearly blew up in the recession, but are on the comeback trail and will do $660 million in revenue this year and should do $720 million next year. EBITDA is solid at around 1/3 of revenue and the stock is trading at 7x the 2013 EPS. In a similar vein, one of the four horsemen of the late 1990s comm IC boom was looking strong. Vitesse Semiconductor (VTSS) makes communication-oriented chips for equipment being sold both to carriers and enterprises. It should do $120 million in revenue this year, growing to $150 million over the next couple years. Analysts are looking for EPS of $0.32 a couple years out, which would make the stock a cheap 8x P/E.

Moving from high tech to high flying, what about Erickson Air Crane (EAC), the maker of heavy duty helicopters for the construction industry? It is more of  a stalwart grower, going from revenue of $152 million in 2011 to $181 estimated for 2013. EPS next year should be $1.43, putting the valuation at all of 4.7x. What the business lacks in sexiness, it makes up in rock solid fundamentals and attractive valuation.

Finally, my fancy was tickled by Northern Technologies (NTIC), a maker of rust prevention products as well as bioplastics. The company is still especially small at a $46 million market cap, but will grow revenue from $20 million in 2011 to $30 in 2013. It is profitable even at their small size and should post EPS of $1.22 next year, putting the valuation at 8x. New products are being sold into the oil and gas exploration market, where corrosion prevention is critically important. This segment should be able to power growth in the years ahead.

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