Three Small-Cap Stocks With Attractive Valuation

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

Small-cap stocks, if picked wisely, provide an excellent opportunity to make blockbuster profits. Everyone wants to get in early and have some share in the growth of the company. I decided to choose three less known small-cap stocks for this article. I filtered the stocks using the following criteria.

  • EPS growth during the current year should be over 15%.
  • Low Price-to-free cash flows ratio.
  • Expected EPS growth of over 10% in next five years.
  • Relatively lower P/E ratio.

My search provided a range of stocks. However, I believe these three stocks are the best of the lot, due to growth opportunities and unique market position. These stocks have great potential and can deliver attractive returns to investors.

Calumet Specialty Products Partners (NASDAQ: CLMT) is a publicly traded limited partnership with five refinery plants in Louisiana, Texas, and Pennsylvania. The refineries process crude oil into specialty products such as lubricating oils, solvents, and waxes, and fuel products including gasoline, diesel, and jet fuel. The specialty products are sold to basic industrial, consumer, and automotive goods companies. The firm also produces asphalt and other byproducts.

  • The company has shown exceptional revenue growth over the past three years. It reported revenues of $1.84 billion at the end of 2009, which went up to $3.13 billion by the end of 2011. The growth trend in revenue has continued and the company has reported $4.45 billion in trailing twelve months revenues.
  • At the moment, the partnership has long term debt of $587 million and debt-to-equity ratio of 1.0. Debt-to-equity ratio of the company is less than the industry average of 1.6.
  • Operating cash flows are growing at a solid rate for the company. At the end of 2011, cash flows from operations stood at $64 million. However, over the last twelve months, the company has generated operating cash flows of $354 million. In addition, free cash flows during the last twelve months stood at $298 million.
  • Currently, the stock is trading at a P/E ratio of 9.3, compared to the industry average of 10.3. Forward P/E of the stock is estimated to be around 8.6.

Coinstar (NASDAQ: OUTR) is a provider of automated retail machines, most notably offering DVD rental services through its Redbox kiosks and coin-counting services through its Coinstar kiosks. Machines are located in a variety of places, including retailers, grocery stores, drug stores and convenience stores. Coinstar operates over 33,000 Redbox kiosks throughout the U.S. and Puerto Rico, and nearly 19,000 coin-counting kiosks in the U.S., Canada, Puerto Rico, Ireland, and the UK.

  • Coinstar has shown exceptional revenue growth over the years. Revenue has grown from $1.145 billion at the end of 2009 to $1.845 billion by the end of 2011. Trailing twelve months revenue stands at $2.158 billion for the company.
  • The company has only $359 million in the long term debt and debt-to-equity ratio of 0.6. Debt-to-equity ratio for the industry stands at $1.0.
  • Coinstar is truly a cash generating machine. Operating cash flows for the company have demonstrated remarkable growth. Trailing twelve months cash flows from operations stand at $457 million. Furthermore, free cash flows are also following operating cash flows and currently stand at $279 million.
  • Three year average EPS growth for the company stands at 75.3%, and it is expected to grow at over 10% for the next five years.
  • The stock is currently trading at a deep discount compared to its peers. It has a P/E ratio of 10.5, compared to the industry average of 38.8. Moreover, forward P/E estimates for the company are around 9.4.

Spirit Airlines (NASDAQ: SAVE) provides passenger airline service primarily to leisure travelers and travelers visiting friends and relatives. It provides travel opportunities principally to and from south Florida, the Caribbean, and Latin America.

  • This airline company demonstrates remarkable revenue growth. Spirit reported revenues of $1.07 billion at the end of 2011, up from $781 million reported at the end of the previous year. Trailing twelve months revenue stands at $1.26 billion, indicating continued growth in revenue.
  • At the moment, the company has no long-term debt. There are only long-term liabilities of $57 million. Industry average debt-to-equity ratio is 2.4.
  • Cash flows are fairly strong for the company. At the end of the previous, the company reported operating cash flows of $89 million. Trailing twelve months operating cash flows have gone up and currently stand at $111 million. Furthermore, the company has free cash flows of $31 million at the moment.
  • The stock is currently trading at a P/E ratio of 10.7, compared to the industry average of 16. However, the forward P/E ratio estimate is even more attractive at 7.4.

Foolish Summary

Surely, investing in small cap stocks have inherent risks attached. These stocks tend to trade on low volume, which brings additional volatility. However, small-caps usually have much higher upside potential than other companies. Among the above-mentioned three stocks, I can specifically recommend Calumet to income-oriented investors. Although Calumet returned almost 80% this year, it still looks cheap with a single-digit P/E ratio. Coinstar and Spirit also look undervalued based on valuation metrics. At the current prices, these stocks are priced for very low future growth rates, whereas they have shown outstanding growth rates in the past.


ecofinstat has no positions in the stocks mentioned above. The Motley Fool owns shares of SPIRIT AIRLINES INC. 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!

blog comments powered by Disqus

Compare Brokers

Fool Disclosure