Three Small Caps for the Rest of 2013

Ash is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Finding companies to invest in is the toughest task of all. We could just buy the big name companies, sit back and hope that they come through with some sort of gains. On the other hand, we could get proactive about all of this and jump right in with some small cap companies.

I’m picking small caps for a couple of reasons. The first is that these companies have the ability to make big gains over shorter periods of time. The second reason is that there’s a great list of small caps put together by Forbes in their annual Best Small Companies list.

Starting With Number One

The logical place to start looking on this list is in the number one spot. Right up there on top is a company called SolarWinds (NYSE: SWI).

SolarWinds is a $4.5 billion company that designs, develops and sells enterprise software. If you were like most people, including myself before I looked into it, you‘d probably have mistaken this company as a solar firm.

As you can see from looking at the list, SolarWinds experienced 38% sales growth, 36% EPS growth and a staggering 54% return on equity over the past year. Those are some incredibly solid numbers.

Taking a look at the company's 10Q for the year 2012 (their most recent filing) you’ll see that it’s much of the same. SolarWinds had total revenues of $73.5 million in Q4 2012, which represented 32% growth year-over-year.

So, where does the company expect to go from here? Well, according to their own financial outlook (PDF), they expect to see total revenues at $75 million in Q1, operating income at 51% of revenues and EPS of approximately $0.37. This all represents around 25-27% growth compared to Q1 2012.

Over the full year, SolarWinds has forecast sales of $330-$338 million. Sales that high would mean that the company has achieved a year-over-year growth rate of around 25%.

Firearms

If you went through the Forbes list you would have seen a staple in the domestic firearms business, Sturm, Ruger & Co. (NYSE: RGR). This company has been around for a long, long time. Despite the age of this company, the 99% EPS growth and a solid 24% return on equity should demonstrate that they’re not done growing yet.

At the time of writing this gun manufacturer has a market cap sitting just shy of $1 billion. They’re also paying a dividend, something a lot of small caps just won’t do. That yield is 3.1%, so this stock would also be a nice small cap portion of a dividend portfolio.

With the filing of their most recent 10K, we can see that the company has been racking up the sales over the recent years.

Firearms sales went from a FY 2008 value of $174 million all the way up to the $484 million that they closed out 2012 with. That equates to 178% growth in sales over the last five years, an incredible amount for such an old company (10K PDF).

Medical

We’ve had technology and firearms, why not finish this up with a look at a consumer facing medical company, Medifast (NYSE: MED). This company also happens to be the one that’s rounding out the top ten with sales growth of 36% and a return on equity of 23%.

Medifast is a company that produces and sells a variety of weight management products. A typical four-week Medifast package would cost an individual somewhere in the realm of $315 and would include soups, shakes, full meals, and desserts in order to help the individual lose weight.

While you may not be buying it, someone is! Looking at their 10K for FY 2012 (PDF) we can clearly see that people are flocking to the company in droves in order to try their meal plans. 2008 revenues came in right around the $110 million mark and have since grown to their 2012 levels of $356 million. That’s a sales growth of 236% over those past five years.

Medifast has a large fan base for their products with more than 20,000 fans on their corporate Facebook page and hundreds of individual pages for local areas. This company does operate like an Avon, but based on what I’ve read from users, I don’t think there’s any mistaking it for a pyramid scheme.

Investing Takeaway

All three of these companies made the Forbes list for a reason: their exceptional growth. While past performance is not indicative of future performance, I believe that these three companies have their markets so hashed out that there’s some definite potential for further growth.

SolarWinds is part of the enterprise software market, a massive space with huge margins for the right products. They’ll continue to make money, and I believe 2013 estimates will come out on the mark, if not under what the company actually puts up.

Sturm, Ruger will be battling legislation but will still continue to sell guns in droves while the government figures out exactly what to do. This company could be a little risky in your portfolio, especially if there is a big crackdown.

Medifast has a loyal following. Building from there will no doubt be their goal over the coming years, and if they are able to do so they will be a very successful company.

All three companies are definitely worth a more in-depth look before you decide to buy. I know that I would personally buy all three names today. Ruger would definitely require some additional monitoring if you’re planning to hold though.


Ash Anderson has no position in any stocks mentioned. The Motley Fool owns shares of Sturm, Ruger & Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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