3 Small Caps on Fire

Few companies double their earnings in just three years. Those that do have the potential to earn investors exceptional returns. But since everyone wants to own large- or mid-cap monster stocks like Baidu, they'll usually cost you an arm and two legs.

But there is an area in the stock market where the fastest growers are frequently overlooked -- because they're too small to attract big Wall Street firms' attention. In anxious markets like these, a small cap on fire can make an outrageously cheap stock.

With that in mind, I used our CAPS screening tool to pick out some of the fastest-growing small companies. The following three companies have doubled their earnings (26% annual growth) over the past three years, quite a feat considering all that the market has been through these past few years.

They also have:

  • Price-to-earnings ratios under 35.
  • Market capitalizations between $100 million and $1 billion.
  • Five-star ratings, the highest possible, from our Motley Fool CAPS community.
 

Market Cap

EPS Growth Rate (past 3 years)

P/E Ratio

CAPS Rating

AgFeed Industries (Nasdaq: FEED  )

$134 million

34.5%

14.8

*****

Neutral Tandem (Nasdaq: TNDM  )

$419 million

86.6%

10.6

*****

Paragon Shipping (Nasdaq: PRGN  )

$203 million

149.3%

3.2

*****


Source: Motley Fool CAPS, as of July 22, 2010.

Of course, screens are merely a first step in the stock-selection process. Let's take a look at these.

AgFeed
AgFeed is an animal feed and pig producer in China, the largest pork-consuming nation in the world where pork makes up 62% of all meat eaten in the country. AgFeed produces just a small portion of the 645 million hogs produced a year in China. The amazing thing is, the demand for pork from China's middle class is so large that China still needs to import pork from U.S. producers such as Smithfield Foods (NYSE: SFD  ) , the United States' largest hog producer and pork processor.

AgFeed has recently been having cash flow issues. Its customers have been squeezed by falling pork prices and rising feed costs leading to a worrisome growth in receivables. However, this did not stop the company from announcing on Tuesday the purchase of U.S. hog producer M2P2 for $16 million in cash and stock. AgFeed plans to use M2P2's expertise and incorporate Western techniques and practices into its hog production farms. With modern farming methods and new Western-style hog production farms, the firm believes it can almost triple its hog production by 2015 from 700,000 hogs to 2 million. This is surely one to watch!

Neutral Tandem
Neutral Tandem provides switching services to telecommunications firms. The "neutral" in its name refers to its market positioning. It provides a neutral service, allowing competing telecommunications firms to not have to rely on a competitor to route information in the most efficient manner.

Many investors believe Neutral Tandem is cheap. For deep dives on this stock, check out this blog post from CAPS member AAOI (Above Average Odds Investing), which contains an interview with Islamorada Investment Management's Cale Smith, or this blog post and research report from CAPS member BetapegLLC.

Paragon
Just a week ago, the Baltic Dry Index, which tracks shipping rates, had fallen more than 60% from a month before, which was certainly not helping shipping companies DryShips (Nasdaq: DRYS  ) and Eagle Bulk Shipping (Nasdaq: EGLE  ) . However, in the past week the index is up, and already analysts are calling the bottom. If shipping is truly back on track, these stocks are sure to do well as the Dry Bulk Shipping Index is currently at a P/E of 5.2.

Is this a good time to hop on a Chinese hog producer, a niche telecommunications company, or do dry shippers catch your eye? Let us know in the comments box below!

Dan Dzombak does not have a stake in any of the companies mentioned in this article. Baidu is a Motley Fool Rule Breakers pick. The Fool owns shares of Neutral Tandem. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (5) | Recommend This Article (5)

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 July 23, 2010, at 3:29 PM, sfmaestro wrote:

    Interesting that you show such stellar results for TNDM. Each time on the recommendation of Hidden Gems on three occasions I bought 100 @21.15 on 10/30/2009, then 100 more @ 15.37 on 2/23/2010 and finally 100 more @ 13.83 on 5/5/2010, very cunningly, I thought, doubling down as we in the trade call it. TNDM now stands at 12.86, showing me a loss of $1159 on my investment (if you can call it that) of $5035. So, please do encourage as many people as possible to buy this so that the price shoots up to a point where I can lose a little less on selling this wonderful high performing stock.

  • Report this Comment On July 23, 2010, at 3:45 PM, kolia wrote:

    Dry Greek shipping ftw, these guys are now buying dirt cheap ships and preparing for the rebound in charter pricing. And for the investor it is the right time to shop for PRGN, FREE, SBLK, EXM, DRYS and others.

  • Report this Comment On July 23, 2010, at 5:10 PM, 153fish wrote:

    feed is down over 40% ytd. It had 8 million in revenue when it earned 7 cents a share. Is the fact they have doubled earnings off of so small a base even meaningful?

  • Report this Comment On July 23, 2010, at 6:17 PM, stanhull wrote:

    From what archives do you get this info?

    PRGN has had falling revenue and earnings for the last year, and it will fall again this quarter. Dry Bulk is very transparent, their fleet deployment is listed. They had three more ships with decreased charters this quarter. They are now estimated to earn 35 cents in 2010 and again in 2011. Thats a PE of over 11. Why would you want to use a PE from 2009?

    There is a chance that the revenue will increase with the new ships, but the charters haven't been released, and containers are still earning just above break even. The new Bulkmship is going to earn $20,000 per day which does not add much to earnings after expenses, and they sold a handy that earned $17,250.

    Screeners are useless, do your homework.

  • Report this Comment On July 27, 2010, at 2:04 AM, Mstinterestinman wrote:

    EBIX 25 % Organic Growth 40% overall growth and about 15 times forward earnings cant get much cheaper.

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