Finding Small Caps for a Winning Portfolio

This article is part of our Rising Star Portfolios Series.

As a Motley investor, I get to scan the universe for investment ideas, no holds barred. I view this as a luxury, but it can also be a curse at times. Why? Sometimes, it can be really tough to whittle it all the good stuff out there down to a few choices.

One of the best things we can do as investors is to constantly keep a watch list, adding and deleting as we work our way toward investing greatness. From time to time, I like to throw down a few parameters and run a screen. Then I sift through it to find the gold nuggets within.

Recently, I screened for small caps (between $1 billion and $2 billion market cap) trading on major U.S. exchanges, with inside ownership greater than 5%, no debt, and a net margin of 10% or more. Of the 24 companies that made the cut, five caught my eye, and two I want to research further:

Company

Inside Ownership

Net Margin

OpenTable (Nasdaq: OPEN  )

12.1%

13.8%

LogMeIn (Nasdaq: LOGM  )

7.1%

20.1%

Heartland Express (Nasdaq: HTLD  )

35.1%

11.9%

Steven Madden (Nasdaq: SHOO  )

11%

11.7%

Buckle (NYSE: BKE  )

43.4%

13.8%

Source: Capital IQ, a division of Standard & Poor's.

Captain's Log ... Me In
Have you ever needed to work from home? Been out of town and needed access to your home computer? If the answer to either of these is "yes," then you'll understand what LogMeIn is selling. The company provides remote connectivity solutions to businesses and consumers around the globe. To date, more than 100 million devices worldwide have connected to a LogMeIn service.

LogMeIn's solutions include offering consumers ways to access and back up their remote computers online, and giving businesses the ability to manage and back up thousands of desktops and systems operations. Cross-platform capability means that LogMeIn works with just about every technology out there, from Windows laptops to Apple iPads.

As cloud computing takes hold, LogMeIn is sure to face stiff competition, but its IPO in June 2009 helped it establish a presence. With its diverse product line, it looks like it has something for just about everyone. In fact, its iPad-optimized app is one of the highest grossing apps in the Apple App Store. The stock seems a little pricey at 57 times trailing earnings, but I think I'll keep an eye on this one for a while.

Don't forget to Buckle up
A few days ago, I took a look at The Buckle to see what kind of operation they've got going. At the time, I knew only that it was a retailer geared toward men's and women's fashion. So I was pleasantly surprised to discover that the company is running a tight ship, with operating margins averaging better than 19% over the last five years.

I appreciate the fact that management continues to open stores at a modest pace. To date, The Buckle has over 420 stores in 41 states, and while it has grown quickly over the past decade, management maintains its commitment to only open new stores when they can show satisfactory results.

Another thing that grabs me is the fact that founder and chairman Daniel Hirschfeld owns just more than 35% of the shares outstanding. Fools know that high insider ownership often means that management's interests are aligned with those of its shareholders -- a quality we love to see. Trading around 14 times earnings, the stock looks reasonably priced today.

Add 'em to the list
So there you go: One screen, five stocks, and two ideas for my watchlist. I'll keep on searching for more great ideas to take my Motley portfolio to new heights. You can follow along, too -- just swing by my discussion board, or find me on Twitter.

This article is part of our Rising Star Portfolios series, where we give some of our most promising stock analysts cold, hard cash to manage on the Fool's behalf. We'd like you to track our performance and benefit from these real-money, real-time free stock picks. See all of our Rising Star analysts (and their portfolios) here.

Stock Advisor analyst Jason Moser owns no shares of any companies mentioned in this article. OpenTable is a Motley Fool Rule Breakers recommendation. 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.


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