Searching for Great Small Caps

This article is part of our Rising Star Portfolios series.

Over the next couple of days I'm going to once again be searching for small-cap stocks for my "multivitamin" portfolio using my Foolish 8 and Modified Foolish 8 screens. The first company I bought from these screens, lululemon athletica (Nasdaq: LULU  ) , is up 30% since I prepared my first article and 13% since my official recommendation. (That's how it goes sometimes; you just can't hurry the research.)

Let's start off with this month's Foolish 8, developed by Fool co-founder David Gardner to identify profitable, rapid-growth, small-cap stocks. Here are the eight criteria:

  1. Revenues: $500 million or less.
  2. Earnings and sales growth: 25% or greater.
  3. Net profit margin: 7% or greater.
  4. Daily dollar volume: $1 million to $25 million.
  5. Insider holdings: 10% or greater.
  6. Share price: $7 or greater.
  7. Relative strength: 90 or greater.
  8. Operating cash flow: a positive number.

The contenders
Eight companies passed the screen this month:

Company

Market Cap (Millions)

Business

Add to Your Watchlist

China Biologic Products (Nasdaq: CBPO  )

$421.5

Biotechnology 

Add

eMagin (AMEX: EMAN  )

$183.6

Electronic manufacturing

Add

GSI Technology (Nasdaq: GSIT  )

$264.3

Semiconductors

Add

Interactive Intelligence (Nasdaq: ININ  )

$644.0

Application software

Add

IPG Photonics

$2,509.4

Electronic manufacturing

Add

LogMeIn

$949.4

Internet software/services

Add

Puda Coal (AMEX: PUDA  )

$325.9

Coal mining

Add

ZAGG (Nasdaq: ZAGG  )

$226.6

Electronic accessories

Add

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

Biggie smalls
By rule, I'm not allowed to buy sub-$200 million companies for my portfolio, so eMagin is out. Here are some important metrics for the remaining candidates:

Company

Insider Ownership

Forward P/E

EV/FCF (TTM)

ROE

Net Margin

China Biologic Products

43%

36.2

15.9

51%

24%

GSI Technology

18%

26.8

41.3

18%

20%

Interactive Intelligence

25%

26.4

30.1

18%

9%

IPG Photonics

26%

33.7

68.9

11%

12%

LogMeIn

10%

48.2

40.2

18%

21%

Puda Coal

33%

7.8

10.3

20%

7%

ZAGG

32%

63.4

184.8

39%

12%

Source: Capital IQ, a division of Standard & Poor's.
P/E = price-to-earnings ratio; EV = enterprise value; FCF = free cash flow; TTM = trailing 12 months; ROE = return on equity.

We already know a bit about Puda Coal and ZAGG since they showed up in the December F8 screen, and I talked about their good and bad aspects in separate articles. ZAGG is up 14% since showing up on my screen, while Puda is down 4%. Tomorrow, I'll show you the results of this month's Modified Foolish 8 screen, and then talk about the companies that interest me, from both screens, in more depth. So don't forget to come back to www.fool.com tomorrow.

If you're interested in keeping up with any of these companies, add them to your free watchlist by clicking the "add" button in the far-right column of the top table. You can also follow me on Twitter and check out the multivitamin discussion board. Until tomorrow!

Fool analyst Rex Moore once saw some fleas sneeze on a bee's knees. He owns no companies mentioned here. Interactive Intelligence, IPG Photonics, and lululemon athletica are Motley Fool Rule Breakers choices. The Fool owns shares of IPG Photonics and lululemon athletica. 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.


Read/Post Comments (2) | Recommend This Article (15)

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 February 22, 2011, at 2:05 PM, rboudbee01 wrote:

    finally some similarities with your book from (was it 1994?).

    I thought you had abandoned about half of those principles with all the large-to-extra-large caps you've been recommending the last 3 years. (But those recs. did perform well, mostly.)

  • Report this Comment On February 22, 2011, at 2:09 PM, rboudbee01 wrote:

    btw, I was referring to the orig. Motley Fools (brothers), not Rex Moore.

    And seriously, David and Tom I would love to know what you've revised and what you've retained from the stock picking recommendations in your book.

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