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10 Small Caps to Rule Them All

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Small-cap companies are absolutely one of my favorite areas to research because you can often uncover hidden gems that analysts have neglected or simply not discovered yet. They can offer the ultimate risk-vs.-reward ratio, but are also not for the faint of heart.

This 10-week series is dedicated to finding the 10 small caps to rule them all. Here are the previous four choices:

This week I want to highlight regional airline provider Allegiant Travel (Nasdaq: ALGT  ) .

What it does
Perhaps the best part about Allegiant Travel is that it operates completely differently from all other airlines. The Las Vegas-based company provides air travel from small cities where larger carriers simply do not operate to more widely known leisure destinations. Think of Allegiant as a modern day Southwest Airlines (NYSE: LUV  ) -- except better. Read on and you'll see why.

How it stacks up
You would think Allegiant's biggest concern would be rising jet fuel prices. Rivals AMR (NYSE: AMR  ) and US Airways (NYSE: LCC  ) have really felt the pinch of rising fuel costs recently, and their shareholders have endured a painful drop in their respective stock prices. Allegiant doesn't have nearly this same concern. Rather than hedging fuel costs, Allegiant will simply limit the amount of flight hours or cancel a route altogether if fuel prices make the route unprofitable. It's such a smart idea it's almost shocking, because no other airline does this.

Allegiant has been profitable for 32 consecutive quarters, which is something none of its competitors can state. Even during the deepest market downturns, Allegiant remained profitable. One reason for this is Allegiant's superior operating margins. Allegiant can control costs and reap the benefits of highly profitable add-on fees, all while offering some of the lowest fares in the industry.


Operating Margin (TTM)

PEG Ratio 5-Year Expected


Allegiant Travel 15.80% 1.8 $150.3M / $28.1M
Southwest Airlines 8.20% 2.7 $3.54B / $3.38B
AirTran Holdings (NYSE: AAI  ) 6.00% 15.4 $454M / $1.03B
US Airways 6.60% 1.6 $1.86B / $4.40B
Republic Airways (Nasdaq: RJET  ) 6.40% 1.0 $291.2M / $2.58B
SkyWest (Nasdaq: SKYW  ) 7.60% 2.2 $783.1M / $1.90B

TTM = trailing 12 months.

These figures paint a very clear picture that no one even comes close to rivaling Allegiant's operating margins or its balance sheet. Many of these airlines are struggling to raise prices while under crushing amounts of debt, but not Allegiant. Now let me show you how Allegiant could make you money.

How it could make you money
Allegiant may be a relatively new face to the air travel sector, but it operates like a veteran. The company charges some of the highest baggage fees in the industry and has been collecting baggage fees since long before its rivals began the practice. Allegiant also charges for food and drinks on its planes.

So what does this all mean; is Allegiant just evil? On the contrary, the move is pure genius. These extra service fees are all almost pure profit for the regional airliner. Higher baggage fees discourage passengers from bringing extra weight onto the plane, which saves on fuel costs, and these fees go straight into the bottom line.

With a focus on profitability, not revenue maximization, Allegiant has been able to buy older, unwanted jets from rivals and turn them into profit maximizers. The company closely monitors fuel costs and keeps its jets flying on the most profitable routes. It's for these reasons, and the company's strong history of profitability, that I feel Allegiant deserves a place as a top small cap to own.

How do you think Allegiant will fare? Is the company a highflier or will it be grounded by fuel costs or another unforeseen factor? Share your thoughts below and consider tracking my favorite small caps, as well as your own list of personalized companies, with My Watchlist.

Fool contributor Sean Williams owns shares of Golden Star Resources, but has no material interest in any other companies mentioned in this article. He would like to remind you not to forget about our friends in Japan who could use a helping hand. You can follow him on CAPS under the screen name TMFUltraLong.

Southwest Airlines is a Motley Fool Stock Advisor selection. Buffalo Wild Wings is a Motley Fool Hidden Gems selection. The Fool owns shares of Allegiant Travel. 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 that's always flying high.

Read/Post Comments (4) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 07, 2011, at 4:55 AM, mhy729 wrote:

    "...Allegiant has been able to buy older, unwanted jets from rivals and turn them into profit maximizers."

    With what has happened at Southwest this might be somewhat worrisome. That said, no doubt Southwest's misfortune/negligence is getting the industry to pay more attention to such safety issues, particularly with aging aircraft.

    Thanks for writing; Allegiant certainly makes a compelling pick for the sector.

  • Report this Comment On April 07, 2011, at 9:05 AM, catoismymotor wrote:

    Airlines??? This sector is cursed. I sooner swim through a pool of razor blades and lemon juice, naked!, than buy any airline.

    With my attitude I could lose out on some good profits but knowing what I know I'll be able to sleep at night by investing in other areas.

  • Report this Comment On April 20, 2011, at 4:01 PM, Dano442 wrote:

    ...what catoismymotor said...also, went to make a reservation on the site today. And after all the seemingly endless add on charges were tallied, I would have saved less than 30 bucks over U.S. Air (less if they charge for carry-ons, which I think they do) and would have had to drive 45 minutes to Ft. Lauderdale. Not the great savings they promise in their ads.

  • Report this Comment On April 20, 2011, at 4:11 PM, buffalonate wrote:

    You are going to wait a long time trying to get wealthy from investing in airlines.

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