TCS Daily

Good Techs Come In Small Packages

By James K. Glassman - October 23, 2001 12:00 AM

History tells us that, when it comes to investment performance, small companies outperform big companies over time. We also know that small company stocks tend to do best heading out of recessions. It's hard to say when the economy will turn the corner, but for long-term investors there are some interesting options among small technology firms.

Forbes magazine recently published its annual list of the 200 best small companies in America. These are the best of the best among publicly traded firms with no more than $600 million in annual revenues. Of course, for the small business owners out there this doesn't seem very small, but relative to GE with its $127 billion in revenues, the rising stars on the Forbes list are downright tiny.

That doesn't mean they can't be very profitable for investors. In fact, small and obscure can be beautiful, as Warren Buffett has found. The legendary investor loves to find companies - lately, those that make carpets and bricks - so obscure that no Wall Street analysts cover them. That way he knows that there's not a lot of hype built into the stock price.

The current Forbes list contains a number of intriguing companies that are not exactly household names, but they all have impressive records of performance. To make the list, companies must have delivered at least 5% growth in revenue and earnings in each of the last five years. Forbes then ranks the companies based on return on equity (income relative to the net worth of the company), growth in sales and earnings per share.

Among the top 25 companies on the Forbes list are several tech firms that may be worth a look. Actrade Financial Technologies (ticker symbol: ACRT) is a leader in electronic payment systems, facilitating high-dollar transactions between corporations in different countries. Trading at a recent price-to-earnings (P/E) ratio of just 11, Actrade boasts a fabulous recent history, with average annual earnings per share growth of more than 69% during the last five years.

Renaissance Learning (RLRN) makes educational software for the K-12 market, and since government schools comprise most of this market, it almost doesn't matter what the economy is doing. Education will continue to receive lots of your tax dollars. That's one reason this company is delivering steady quarter-to-quarter growth - with earnings rising by one-third in the most recent six months - even in a faltering economy. Another reason is because Renaissance is a well-run firm with a solid balance sheet - loads of cash and zero debt.

Cabot Microelectronics (CCMP) sounds like a computer chip company, but it actually makes specialty chemicals used in the manufacture of the latest chips. Cabot's chemicals are used with pads also made by Cabot to polish silicon wafers to an almost perfect smoothness, allowing the etching of microscopic layers of circuitry on top of the wafers. The company has also buffed its earnings to a high shine, but its P/E ratio remains relatively low for a fast grower. For the 12 months ending in June 2001, Cabot's earnings increased by a whopping 105% on an 85% jump in revenues. At the end of this week the company will announce its earnings for the most recent quarter and the news may not be so bright, as the semiconductor industry continues to slump. But for the long haul, Cabot appears to have a strong position in a lucrative niche market - and only six analysts cover the stock.


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