I won't say I told you so. (But I did.)
Less than three months ago, I highlighted three past picks from the Motley Fool Hidden Gems small-cap investing newsletter. Three hidden gems that, in the months since we first recommended them, either dropped in value, went more or less nowhere, or rose in value -- but less than they deserved to based on their business performance.
One of those three, satellite telecommunications equipment maker Radyne
So what's underlying the growth in price? Growth in sales and profits, of course.
Radyne announced an astounding 71% improvement in quarterly sales in Q2 2005 vs. Q2 2004, a number swelled by its recent acquisition of Xicom. Profits followed close behind with a 57% improvement, and profits per diluted share brought up the rear at 50%.
Ordinarily, when revenues skyrocket and profits per share just, er, rocket, a Fool can be forgiven for suspecting that old bane of investors: stock dilution. As I discussed in "Give a Hoot. Don't Dilute," companies such as Apple
The real reason Radyne's profit growth didn't quite keep pace with its sales was that the company paid very low taxes last year. Sales may have grown 71% in Q2 2005, but the IRS's share of those sales grew 1,200%! Had the company's taxes increased at the same rate as sales, Radyne would actually have grown its profits by 136% -- far outpacing sales growth.
However, all of the above only partly explains Radyne's 63% increase in price over the past 70 days. In this Fool's opinion, the primary reason that Radyne has done so well is that the company was drastically undervalued. In contrast to Hidden Gems recommendations Buffalo Wild Wings
Which has me feeling more convinced than ever that our most rewarding investment ideas at Hidden Gems aren't necessarily the two new picks we provide our members every month. Our best prospects just might be the small-cap companies hiding in our back issues. The ones that the world has forgotten, or will never find. To read more about why we like these and more than 45 other small-cap stocks, Fool co-founder Tom Gardner is offering a free 30-day trial to Hidden Gems. Simply click here to learn more.
*Incidentally, if you're wondering how the other two companies we highlighted back in May fared, Portfolio Recovery Associates