It's been tough sledding for stocks. The
Dow Jones Industrial Average (DJIA)
has dropped at least 100 points on four separate trading days so
far in May, bringing a wide array of stocks down from recent highs.
Lost in the negative price action is a bit of bright news: Some
companies posted very robust quarterly results this month,
presenting investors with a chance to snap up
shares
while most are in "sell" mode.
I went searching for the small-cap stocks (which I define as having
market values between $200 million and $1.5 billion) that delivered
scorching results (exceeding consensus
profit
forecasts by at least 25%), yet still trade for less than the
market multiple (the average stock in the S&P 500 trades for
around 15 times projected 2012 profits). To make sure the stocks in
my screen are sufficiently
liquid
(and hence not subject to wild price swings due to low trading
volume
), I narrowed the list to stocks that trade at least 150,000 shares
a day, on average.
Of this list, three stocks caught my attention. Here's why…
1. Energy Solutions (NYSE:
ES
)
As Japan wrestles with a continuing nuclear crisis, nuclear energy
advocates in the United States are getting cold feet. Many had
begun to support a new round of nuclear power plants to help reduce
dependence on imported oil, but after the Japanese nuclear disaster
that evolved in the aftermath of a major earthquake and tsunami
that hit Japan in March, that support is quickly disappearing. As a
result, nuclear-related stocks have fallen out of favor. [See
StreetAuthority contributor
Steven Orlowski's recent article on this topic
.]
But this company shouldn't be painted with the same brush.
Energy Solutions actually helps take old nuclear power plants apart
after they have been taken out of service, in a process known as
de-commissioning. With more than 100 U.S. nuclear power plants set
for closure within the next two decades, the company is likely to
see ample opportunities. (Many of these plants were built more than
30 years ago and have already exceeded their originally-planned
life spans.)
De-commissioning can be profitable work. Energy Solutions just
delivered strong first-quarter profits, thanks to impressive
margins generated for these services. The company expects to
generate at least $130 million in
earnings
before interest, taxes,
depreciation
and
amortization
(EBITDA) this year, though it is valued at less than $500 million.
Energy Solutions' EBITDA could be even more robust next year, as
the company winds down an unprofitable major program in the U.K.
Analysts at Sterne Agee expect operating margins to expand 140
basis points to 8.2% in 2012. This could boost EBITDA closer to
$160 million. Part of the
margin
gain is also coming from China, where the company is helping
establish nuclear storage areas to handle processed fuel at several
new Chinese nuclear plants. Between de-commissioning in the United
States and new construction in China, Energy Solutions is shaping
up to be a stronger profit play than many are expecting.
2. Chiquita Brands (NYSE:
CQB
)
Consumers know the Chiquita name a lot better than Wall Street. The
purveyor of bananas and packaged produce has been undergoing an
impressive
turnaround
, even as shares have barely moved up from 12 months ago. A pair of
factors is helping turn Chiquita into a very profitable company.
First, the company has considerable exposure to Europe, where
demand for bananas is strong and the firming euro helps keep prices
stable. Second, the company has started to tighten its cost base,
leading to solid year-over-year gains in its
bottom line
.
In the most recent quarter, Chiquita's sales rose $16 million from
a year ago, but its cost of goods sold dropped by $18 million. That
$34 million
gross margin
gain went straight to the bottom line, helping the company earn
$0.52 a share, its best first-quarter showing in nearly a decade.
Per-share profits in the seasonally strong second quarter could
approach $1.50, and full-year earnings-per-share (
EPS
) forecasts of around $2 in 2011 and 2012 now look far too
conservative.
Shares have been partially weighed down by a large
debt load
, which was a serious concern when Chiquita was unprofitable for a
string of years in the middle of the last decade. But rising
profits are helping bring debt down --
long-term debt
is on track to fall from $766 million in 2008 to around $550
million by the end of this year.
This may never be a fast-growing
business model
, but surging profits and falling loan balances may help shares
move from a current $15 to north of $20, granted the company
maintains its tight cost controls.
3. AirCastle (NYSE:
AYR
)
I'd be remiss if I failed to once again mention this
aircraft-leasing firm. I've noted on several occasions that shares
sell for less than
book value
. So when the company also appears on a screen of solid profit
generators, it's a sign the stock deserves more attention. Shares
currently trade for around 10 times projected 2012 consensus
forecasts, though this outlook now looks conservative and, as a
result, the forward multiple is likely in the high single-digits.
The fact shares still trade well below tangible book value is just
icing on the cake. Shares have pulled back in this challenging
market to less than $12, though they should eventually move into
the upper teens once the gap between the current
market value
and projected year-end book value is closed.
Action to Take -->
Most of these stocks have failed to rally in the face of strong
first-quarter results simply because the broader stock market is
attracting little buying interest right now. As a result, this may
be a great time to research these names heavily, as they are likely
solid upside candidates when buyers return to the market.
-- David Sterman
Disclosure: David Sterman and/or StreetAuthority, LLC hold a
position in NYSE:AYR, NYSE:CQB, NYSE:ES.