Best Small Companies (2016)

Best Small Companies (2016)

We lamented the decision by Forbes to discontinue their annual Best Small Companies list last year. 36 years in the running, the list provided a number of actionable opportunities over the last couple of decades for many of us. That said, while sticking to their core criteria, we may have actually improved the discovery and screening process. The returns posted by the lists, orphaned for two years now, have been 19.0% and 21.6%, respectively. For context, the Wilshire 5000 checked in at approximately 4% for both periods. With this experience under our belts, we head for the haystack in search of promising smaller companies to bolster our all-of-the-above investing discipline and hoping for a solid January Effect.

The Russell 2000 (RUT) gained 2.5% from 10/31/2015 through Halloween 2016.

The Wilshire 5000 (VTSMX) did a little better, checking in at 4.1% during that same period.

Every Halloween, we remind our fellow investors to be extra vigilant for opportunities among smaller, faster-growing companies, during the 4th quarter of the year. History suggests that some opportunities are created by tax-related selling. The smaller companies are impacted the most and those with solid expectations often get a stock price boost during January when investors return after wash sale periods expire.

Small Cap Does Not Mean Small Company

It’s also a time when we are reminded that small cap does not mean small company. As a case in point, the average sales growth forecast for the Russell 2000 (EQWS) is approximately 6.0% — the type of growth more closely associated with stalwarts and larger blue chip contributors. If you’re really looking for small companies, we suggest an emphasis on higher growth rates. This month’s fund feature is Conestoga Small Cap (CCASX) featuring an average sales growth rate of 13%. Go ahead. Check out the companies held by Conestoga. (See page 4.) In a word, they obviously shop for leadership small companies in much the same way that we do and can/should be considered a qualified source of ideas. Conestoga features a +2.4% (annualized) excess return versus the S&P 500 over the last ten years.

The criteria used to build the list is largely faithful to the Forbes traditions. Specifically, annual revenues were limited to less than $1 billion, but required to be greater than $50 million. We also required a minimum stock price of $5. Because we feel the sales growth forecast is the strongest characteristic to define “small” — we required a minimum growth forecast of 10%. No asset-based companies from the financial sector were included. And finally, when we think about “Best” we think the combination of quality and return forecast is a great place to start.

This Year’s Haystack

The companies that qualify for our 2016 Best Small Company Manifest are shown in the accompanying table.

Newcomer Meridian Bioscience (VIVO) checks in at #1. VIVO is covered in the Value Line Standard Edition and had a 16% low total return forecast (11/18/2016). Meridian Bioscience provides diagnostic test kits, purified reagents and related products, as well as biopharmaceutical enabling technologies. Products are marketed to hospitals, laboratories, veterinary centers, physician offices, diagnostic manufacturers and biotech companies worldwide. The company is headquartered in Cincinnati, Ohio and investors are encouraged to explore the investor relations materials at:
www.meridianbioscience.com

Diagnostics as a “theme” are fairly prevalent among the best small companies. Solomon Select feature Mesa Labs (MLAB) is one example and Mid-Michigan local favorite, Neogen (NEOG) is another. Both of these companies were “discovered” via the Forbes list and continue to qualify. Another company that qualifies as biopharma-enabling might well be Simulations Plus (SLP) but the company falls a little short of the annual revenues minimum.

We expected to lose last year’s #1, Forward Air (FWRD) to “graduation” but the recessionary conditions in transporting “stuff” kept FWRD below the $1 billion maximum. Forward Air had been a resident of the Forbes listing for seven years … so this makes it nine years for this logistics leader.

The top performer from last year’s best small companies was Ubiquiti Networks (UBNT) with a total return of 79.7%. Ubiquiti develops high performance networking technology for service providers and enterprises. UBNT is closing the digital divide by building network communication platforms and has 38 million devices worldwide. Ubiquiti just missed qualifying for this year’s list — ranking #41 as the UBNT return forecast is down to 7.9% following the robust performance over the last year.

 

Diagnosis: Ubiquitous

We think a ubiquitous haystack is a path to opportunity and success. We’re reminded that we can’t achieve proper balance unless we’re continuously searching for the next promising well-managed small company. We’re reassured by the presence of several long time favorites on this study list and look forward to discovering and diagnosing at will.

Fave Five (11/4/2016)

Fave Five (11/4/2016)

Our Fave Five essentially represents a listing of stocks with favorable short term total return forecasts (1 year, according to Analyst Consensus Estimates, or ACE) combined with strong long-term return forecasts and good/excellent quality rankings.

Every year, we remind investors to focus on small company opportunities in the final quarter of the year. Tax-related selling can often provide outsized opportunities — a condition that is amplified among the faster-growing and promising smaller companies. We used to urge investors to carefully mine the Forbes List of Best Small Companies that was published in late October for 36 years. Unfortunately, Forbes discontinued the feature last year. Fret not. We’ll be out with our own list of 40 Best Small Companies soon (final edits in progress.) The 2016 collection performed very well for the second straight year.

The Fave Five This Week

This week we’re taking a detour to feature the five companies at the top of our 40 Best Small Companies for 2017. As shown here, the 2016 collection outdistanced the Wilshire 5000 by a considerable margin — beating the total stock market for the 8th time in 11 years with an excess/relative return since inception of +4.6%.

  • Forward Air (FWRD)
  • Mercadolibre (MELI)
  • Meridian Bioscience (VIVO)
  • Mesa Labs (MLAB)
  • Neogen (NEOG)

Context: The median S&P price to fair value ratio is 102%.

The Long and Short of This Week’s Fave Five

The Long & Short. (November 4, 2016) Projected Annual Return (PAR): Long term return forecast based on fundamental analysis and five year time horizon. Quality Ranking: Percentile ranking of composite that includes financial strength, earnings stability and relative growth & profitability. VL Low Total Return (VLLTR): Low total return forecast based on 3-5 year price targets via Value Line Investment Survey. Morningstar P/FV: Ratio of current price to fundamentally-based fair value via www.morningstar.com S&P P/FV: Current price-to-fair value ratio via Standard & Poor’s. 1-Year ACE Outlook: Total return forecast based on analyst consensus estimates for 1-year target price combined with current yield. The data is ranked (descending order) based on this criterion. 1-Year S&P Outlook: 1-year total return forecast based on S&P 1-year price target. 1-Yr GS: 1-year total return forecast based on most recent price target issued by Goldman Sachs.

Weekend Warriors

The relative/excess return for the Weekend Warrior tracking portfolio is +4.0% since inception. 52.5% of selections have outperformed the Wilshire 5000 since original selection.

Tracking Dashboard: https://www.manifestinvesting.com/dashboards/public/weekend-warriors

16 Stocks On The Launch Pad?

Screening Results (February 2016)

In Search of “First Stage” Potential

by Mark Robertson

As we’ve watched the Broad Assets investment club win three of the last four years in the Groundhog group competition, we’ve searched for a common theme … a genesis of their statistically significant success.

Escape Velocity?

Our May 2014 cover story captured the essence pretty well. We’re looking for companies that are not only well-positioned for the long term with the insurance component of high quality, but companies poised to deliver large year-over-year increases in earnings. If we believe that stock prices follow earnings — and we do — it seems natural to seek these launch pad situations.

This month’s screening results are an attempt to do just that. The list that follows is a collection of excellent quality companies. But they also have relatively large expectations for 2016 earnings vs. 2015. The average forecast increase is 12.4%. All of these top that threshold. We include the relative strength index (RSI) for a glance at oversold potential. (RSI near 30) We’ll check back in a year to see if the EPS step changes take shape and if prices follow. If they do, it won’t hurt my Groundhog 2016 entry a bit.

Fave Five (1/22/2016)

Fave Five (1/22/2016)

This week’s Fave Five includes (4) repeat selections and one recent favorite, the #1 ranked company in this year’s Best Small Companies listing a couple of months ago.

Our Fave Five essentially represents a listing of stocks with favorable short term total return forecasts (1 year, according to Analyst Consensus Estimates, or ACE) combined with strong long-term return forecasts and good/excellent quality rankings. This week’s Top One Percenters are Apple (AAPL), Cognizant Technology (CTSH), Forward Air (FWRD), F5 Networks (FFIV), and Under Armour (UA).

Context: The median 1-year total return forecast (via ACE) for the Value Line 1700 is 32.0%. The median 5-year return forecast (MIPAR) is 9.9% (annualized).

The Long and Short of This Week’s Fave Five

Weekend Warriors

The relative return for the Weekend Warrior tracking portfolio is +2.6% since inception. 60.0% of selections have outperformed the Wilshire 5000 since original selection.

Here are some links to fairly recent monthly stock features, Round Table discussions and/or analysis updates for companies in the tracking portfolio:

  • Apple (AAPL)
  • Forward Air (FWRD)
  • Stericycle (SRCL) Feb-2014 Round Table nomination by Nick Stratigos (starts at 18:33 of session)

Tracking Dashboard: https://www.manifestinvesting.com/dashboards/public/weekend-warriors

50 Best Small Companies (2015)

This Week at MANIFEST

It’s a busy week — starting with closing out our selections for the Manifest Investing Best Small Company list … to the rescheduled Round Table on Tuesday night … to spending some quality time with friends in Seattle at their annual conference for long-term investors.

A couple of weeks ago, we were advised by Forbes that there would be no 37th Annual List of Best Small Companies. So, after 36 years and the reality that this list has provided a number of actionable and rewarding situations over the last 20 years or so, we’re left to hope that it’s a one year hiatus. The Forbes list has always been a favorite and we’ve reminded investors to “trick or treat” around Halloween every year. “It was a sad day in the Kavula household.” — Ken Kavula.

So — while remaining relatively faithful to the Forbes methodology — we decided to generate our own. We’ll do a full narrative and feature this as our cover story for November, but for now, here are the highlights and the 50 Best Small Companies by Manifest Investing.

Methodology

Criteria:

  • SMALL Annual Revenues less than ONE BILLION
  • Sales growth >= 10%
  • Annual Revenues > $50 million
  • Stock Price > $5
  • BEST Ranked by Highest Quality (Percentile ranked composite of Financial Strength, EPS Stability and relative Sales Growth Forecast and Profitability)
  • No Asset-Based Business from Financial Sector

Published Dashboard for 50 Companies: https://www.manifestinvesting.com/dashboards/public/best-small-companies-2015

Manifest Investing 50 Best Small Companies (As Inspired by Forbes)