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The Best Small Cap for 2007: Labor Ready

So you're looking for the best small-cap stock for 2007? Well, have I got a doozy for you. Meet Labor Ready (NYSE: LRW  ) , a company that specializes in providing temporary labor. It's distinguished from some of its industry brethren, such as Manpower (NYSE: MAN  ) , Accenture (NYSE: ACN  ) , and Adecco (NYSE: ADO  ) , by its focus on manual labor, rather than white-collar or executive workers.

Here's how the company describes itself:

Each year, Labor Ready dispatches approximately 600,000 temporary employees to jobs in construction, manufacturing, hospitality services, landscaping, warehousing, retail and more. More than 300,000 businesses of all sizes throughout the United States, Canada, and the United Kingdom use Labor Ready when they need a dependable source of labor.

You've probably seen plenty of Labor Ready workers -- some even man the Salvation Army red kettles you pass on the street during the holiday season.

What's to like?
Let's return to the company as an investment. Here are some stats:

  • Market capitalization: $1 billion
  • P/E ratio: 14.7
  • 52-week low/high: $14.94/$27.75
  • Recent price: $19.30
  • Return on assets: 11.7%
  • Return on equity: 20.5%
  • Net profit margin: 5.2%
  • Stock price appreciation: 16.6% per year, on average, over the past decade, and 30.4% over the past five years

One thing I like about the company is that it's still a small cap -- the segment of the market that historically offers the best returns. Manpower, in contrast, sports a market cap six times as big and a profit margin less than half that of Labor Ready's.

Some cautions
The company has experienced a bit of turnover in its executive suites. CEO Joe Sambataro stepped down in mid-2006, but is remaining on the board of directors, while former CFO Steve Cooper, far from a stranger to the company, has taken the helm.

In addition, all the company's numbers aren't totally rosy. I cited some strong growth in recent years. Well, though the past two years look better, revenues experienced a slump in 2002 and 2003.

One more concern is the possible dilution of value due to a rising share count. You can spot this happening by comparing the growth rates of net income and earnings per share (EPS). Between fiscal 2004 and fiscal 2005, for example, net income grew 71%, while EPS advanced just 57%.

Finally, consider the economic environment. If the housing market crashes, for example, we may face a period where significantly fewer homes are being built, requiring much less manual labor.

What others think
Overall, though, this company holds a lot of promise. Here's what some participants in our brand-new Motley Fool CAPS community-intelligence database are saying about it:

idoxlr8: The economy is doing well. It is clear that this country is experiencing a labor shortage that no one wants to admit. This company is at the low end of the range and I expect it to be in the mid-twenties within 12 months. The earnings just can't keep coming like this without the stock price eventually catching up.

g7game: Good growth, and beaten down. Plenty of long term value.

What do you think?
So what do you think? Is Labor Ready a top contender for 2007, or do you favor other lovely little nuggets?

Register your opinion in Motley Fool CAPS. You can rate Labor Ready to outperform or underperform the market over the coming year. Based on your response, we'll declare the best small-cap stock of 2007 early next week.

Seen our other contenders for best small cap? If not, click here.

Longtime Fool contributor Selena Maranjian does not own shares of any company mentioned. Labor Ready is a Motley Fool Inside Value recommendation. The Motley Fool is Fools writing for Fools.

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Selena Maranjian

Selena Maranjian has been writing for the Fool since 1996 and covers basic investing and personal finance topics. She also prepares the Fool's syndicated newspaper column and has written or co-written a number of Fool books. For more financial and non-financial fare (as well as silly things), follow her on Twitter...

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