Tag - Lsr

Ian Wyatt is the chief investing strategist of SmallCapInvestor.com and the chief executive officer of Bushiness Financial Publishing, a publisher of both free and paid subscription newsletters, e-letters, special reports and financial websites. Prior to Business Financial Publishing, Wyatt launched BizFN.com, a free investment website where individual investors could access research and analysis from money managers and financial advisors around the country. In 2007, Wyatt was selected as one of 60 entrepreneurs to participate in the Entrepreneurial Masters Program (formerly Birthing of Giants) at the Massachusetts Institute of Technology Sloan School of business, a three-year executive development education program.

What qualities do you look for in a small-cap stock? Have your criterion changed given the current macro environment?

“Increasing cash flow remains the single best measure to separate the haves from the have-nots. If a firm’s cash flows aren’t increasing, be wary. We look for strong top and bottom-line growth of 25% or greater on a quarterly and annual basis, a build up of cash on the balance sheet, a trend of successive upside earnings surprises and upwardly revised estimates. The company should operate in a favorable industry and markets that contain extraordinary growth potential.

“In the current environment we wouldn’t expect to find as many companies with 25% revenue and earnings growth, so in that sense, yes my expectations have been lowered. We pay closer attention to guidance in this environment, as the probability for downgraded outlooks is more likely.”

What are your favorite small-cap stocks with market caps of under $1 billion for the year and why?

“T-3 Energy Services (Nasdaq:TTES), Life Sciences Research (NYSE:LSR), Cano Petroleum (AMEX:CFW) and Merit Medical Systems (Nasdaq:MMSI) because of the specific niches they operate in.

“T-3 Energy manufactures and repairs equipment used in the drilling and completion of new and existing oil and gas wells, and for the production and transportation of oil and gas. The company has three product lines: pressure and flow control, wellhead and pipeline. Since April 2003, T-3 Energy has introduced 43 new products. As of March 9, the company had 18 manufacturing facilities located throughout North America.

“Equipment failure in the energy industry is not an option and as such T-3 Energy’s customers — namely many of the big exploration and pipeline companies . . .

Investing in pharmaceutical companies can be a risky business where investors essentially bet on whether clinical trials will pass with flying colors, which many times isn’t the case. Many drug companies have now adopted the method of “outsourcing” clinical trial testing to firms such as Life Sciences Research, Inc. (NYSE:LSR), to assuage risk that could directly affect financial results.
 
The outsourcing of drug testing is becoming big business: it’s currently estimated that 25% to 30% of pre- and non-clinical testing is outsourced, and industry analysts such as Hamed Khorsand with BWS Financial believe that this percentage, as well as the absolute dollars that go toward outsourcing, will continue to grow.

Life Sciences, which has an estimated annual testing capacity of over $300 million, is in the business of teaming up with clients for Phase 1 clinical trials to independently verify results. The company is the largest provider of pre-clinical efficacy testing in the United Kingdom and Europe, and is globally one of the “big three” that include Covance (NYSE:CVD) and Charles River Labs (NYSE:CRL).

On top of assessing whether products meet regulatory and commercial requirements for human consumption, Life Sciences also tests the effect of compounds on the environment and assesses the safety and efficacy of veterinary products, though 85% of the small cap’s customers are pharmaceutical companies.

The company is beginning to catch Wall Street’s attention: Life Sciences has brought its operating margin back to the 15% to 17% range, with aggressive growth that has yet to reach a ceiling. According to Khorsand, the small cap is sitting on an approximate 26% growth capacity.

The staple of Life Sciences’ growth is a reflection of growth in the pharmaceutical industry as a whole. As more and more potential drugs are tested for market, the need for independent research jumps. Will there be new drugs for the treatment of depression, cancer, weight control, blood pressure and other ailments? Count on it. In order for the pharmaceutical industry to achieve its targeted margin growth, the industry will need to bring an even greater number of therapies to . . .