It’s a Small Cap World (for Now) – Russell 2000 Index Up nearly 18 Percent for Year

Graphic courtesy of Russell Investments

 

The stock market finally “took a breather” on Monday of this week, as the Wall Street Journal characterized it. The resilient bull market of 2013 has seen only four sessions in May that had a decline in the Standard & Poor’s 500-stock index and Monday was one of them. This year’s bull market rally has recently been across the board–Asian markets have been up, European markets turned up, and market watchers are anxiously waiting for tomorrow, Wednesday, May 22, when Federal Reserve Chairman Ben Bernanke is scheduled to testify to Congress and the Fed releases the minutes from its last public policy-setting meeting. Will Bernanke offer up any clues about his next steps?

Most importantly for Smallcap World, the Russell 2000 index, which tracks the performance of smallcap U.S. equities, climbed above the 1,000 level for the first time Monday, a metric that MarketWatch considers “psychologically important” for smallcap stocks. As of Monday morning, May 20, the Russell 2000 was up 17.9 percent for the year-to-date, according to FactSet (The Associated Press reported the Russell 2000 up 17.5 percent for the year).

The conventional wisdom is that small caps stock are doing well because they are more U.S. focused than the large caps, which tend to be multi-national. And the U.S. economy is recovering as opposed to other economies around the world. But many large caps are doing well, too,

You don’t have to look far to find small cap stocks at 52-week highs, even “all time highs.” Of course the question always is, how much higher can these stocks go? Buy now or wait for the correction that so many experts have been predicting is right around the corner for months now?

We’ve selected a few stocks we know are at all-time or 52-week highs, and others we’ve covered lately that seem to be on the upswing.

Calabasas, CA-based National Technical Systems * (Nasdaq: NTSC, http://www.nts.com/) is a relatively unknown smallcap stock but also the world’s largest independent engineering services and testing company. It’s biggest markets include aerospace and defense, but also works in the automotive and telecommunications markets, among others. NTSC closed at an all-time high of $13.09, up 94 cents on May 21, with a market cap now of about $150 million. NTSC is lightly traded, only about 7,500 shares a day, although that is trending up. 

Northville, MI-based Gentherm * Incorporated (Nasdaq: THRM, http://www.gentherm.com/) is a global developer and marketer of thermal management technologies for a broad range of heating and cooling and temperature control technologies. Best known for its Climate Control Seat systems that actively heat and cool seats in more than 50 vehicles made by the world’s leading automobile manufacturers, Gentherm (formerly called Amerigon) has branched out into heated and cooled bedding systems, cupholders, storage bins and office chairs. THRM also reached a 52-week high of more than $18 this week, then closed May 20 at $17.78, down 33 cents for the day. Its market cap is now $594 million. As recently as last July THRM was trading at just above $10.

We recently featured Cincinnati-based LSI Industries (Nasdaq: LYTS, http://www.lsi-industries.com/) , a company that offers a different take on an LED lighting company. LYTS creates LED video screens and LED specialty lighting for sports stadiums and arenas, digital billboards and entertainment companies. It closed April 29 at $7.09 with a market cap of $170 million. LYTS closed May 21 at $8, up 1 cent for the day, with a market cap now of $192 million.

Analysts at CRT Capital recently upgraded Atlanta-based Beazer Homes USA (NYSE: BZH, http://www.beazer.com/), a company that builds and sells single-family and multiple-family homes in 16 states in the U.S., to a “Buy” with a $29 price target. BZH also acquires, improves and rents homes. The company operates through commissioned home sales counselors and independent brokers. As recently as last Sept. 14 BZH was trading for $3.77. It closed March 20 at $16.86 with a market cap of $410 million. BZH closed May 21 at $21.75, down 98 cents for the day. Its market cap is now $538 million.

San Jose, CA-based SunPower Corp. (Nasdaq: SPWR, http://www.sunpowercorp.com/), like many solar stocks, have been on the upswing lately. SPWR closed May 8 at $15.36, down 6 cents for the day, with a market cap of $1.8 billion. It closed May 21 at $21, down $1.70 for the day but got up to $23.76 just last week. Its 52-week trading range is now $3.71-$23.76.

Fremont, CA-based Procera Networks (Nasdaq: PKT, http://www.proceranetworks.com/) works with mobile and broadband network operators providing intelligent policy enforcement solutions for managing private networks. PKT’s products are sold under the PacketLogic brand name to more than 600 customers in North America, Europe and Asia. PKT’s 52-week trading range is $10.12-$25.99. At mid-day May 2 it was trading at $11.22, with a market cap of $229 million. At market close May 21 PKT was trading at $13.89, down 3 cents for the day, with a market cap of $282 million.

* Denotes client of Allen & Caron Inc., publisher of this blog.

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Mary Lisanti: Continued Corporate Earnings Growth in 2013 (When the Federal Government Resolves the Budget)

Mary Lisanti is president and portfolio manager of AH Lisanti, an investment management company currently focused on small cap growth companies. She is a 33-year veteran of small cap growth research and investing. For the first 12 years she was a small cap analyst and strategist on Wall Street. During the past 18 years, she has managed small cap portfolios at premier asset management companies. As CIO of ING Investments LLC, (1998-2003) she was responsible for building the active equity management team, and assets under management in her area grew from several hundred million to several billion dollars. Prior to ING, Mary was at Strong Capital Management as Senior Portfolio Manager for both the Small Cap Growth and Mid Cap Growth Strategies and was Managing Director and Head of the Small/Mid Cap team at Bankers Trust Company. Mary was named Fund Manager of the Year in 1996 by Barron’s. She was named #1 small cap analyst in 1989 by Institutional Investor’s All-Star Research Team. In addition, she was ranked #2 and #3 in 1987 and 1986 respectively.

Mary-headshot

I had the pleasure of talking to Mary just before the New Year’s holiday at her office near Rockefeller Center.  We had first met in the late 1980s when she was interested in a technology company that proposed the radical idea of a keyless car ignition or computer security system using a fingerprint.  Interesting how what seemed futuristic now seems almost as old hat as, well, men on the moon.

JA:  How are you feeling about the year ahead?

ML:  Undecided.  I’ll give you some positives and some negatives.  One big positive is that corporate profit growth will still be decent.  Corporations are at very high profit margins, but when you break down what’s going on, there’s no reason they shouldn’t go higher.  Virtualization – the use of cloud computing, and other aspects of today’s high tech should help them cut costs.  For that trend to stop, two things would have to happen: a long period of negative revenue growth, accompanied by fast-rising wages.  Neither of those things is happening.

That will be a positive for the market.  Corporate profits are growing 8-10% and we believe that can continue, and that is widely dispersed across the board.  Small caps can grow even more,we believe, although again there will be wide dispersion in individual results.  This will be a classic stockpicker’s market.

The biggest negative for the market is that we cannot seem to govern ourselves.  That weighs on multiples.  That’s why, four years into this recovery, multiples are still low, particularly when you take into account where interest rates are and how  GDP growth, although below trend, continues to chug along at 2% or so.  In that scenario, logic would have it that multiples would be in the range of 18-19, but they are not.  Why not? I believe it is because of our inability to govern. Politicans are behind the curve;as they usually are, in addressing our structural issues to bring the long term deficit issues under control. Will they address the longterm issues or not?  If they do so now, it will require only modest changes to entitlements and spending. The extent to which we address those issues will affect the performance of the market going forward.

It is psychologically important to multiples: if you can slow the growth in spending at least a bit, you give people more confidence.  In the Clinton years they managed to slow the rate of growth in spending, and Clinton left office with a surplus.  I believe we will spend most of 2013 arguing about entitlements and other budget issues.  Next year it will be the Democrats saying no to entitlement reform, just like this year it was Republicans saying no to taxes.  I don’t know how much it is possible to get done, because it is being done in a fishbowl and from ideological positions that don’t accommodate compromise.

If they do not get something done, I fear that US debt will get downgraded again.

JA:  And would any of the DC politicians feel responsible if that happened?

ML:  I do not believe so, no.  Politicians, in my opinion, are in the business of passing the blame.  If there were another downgrade, it would affect President Obama’s legacy, and I don’t think he wants to be the president who oversaw two debt downgrades in his time in office.  Both sides will have an incentive to compromise and hopefully they will.  The biggest risk to all of us, and to the market, is that the dollar loses a bit of its luster as the currency of last resort.

When you look at Japan and China and Europe, they are getting their act together with regard to being attractive places to invest and could even potentially be attractive as reserve currencies in a few years.  My biggest concern is that we permanently change corporate behavior: if you have a climate of uncertainty for long enough you make people afraid.  Business overall has been clear with Washington that the uncertainty is damaging.  R&D tax credits, farm and agriculture bills, accelerated depreciation – Congress has been handling these as though they were annual issues, and they’re not.  They affect multi-year planning.  When the R&D tax credit was put in place in the early 1980’s, it was in place for 4.5 years.   That would be better—it would give businesses the ability to plan longer term..

These and other things are casualties of this ideological warfare in Washington.

JA:  What do you see as strengths in 2013?

ML:  It is an enormous positive that housing is recovering, and the recovery should continue, assuming Washington does not cut the mortgage deduction..  Unemployment is declining, although it is declining too slowly.  And we have cheap sources of energy.  . A number of industry sources believe that we will be energy independent in the next decade or so, which is a huge positive for our manufacturing competitiveness.

When you look at these things, once we make it through this budget and debt-ceiling problem, things look a lot better.

Governments all over the world have been spending money to fix the problems that caused the recession, and odds are that things will not fall apart again soon.  Over the past several years, we have had a major issue every year that has “terrified” us: last year it was the potential breakup of the Euro and Greek debt default, and this year it was the budget crisis in the U.S. Beyond the budget crisis, I do not see an issue that has the potential to scare investors as much as these two issues have. We should enter a period of more “normalcy,” where macro issues take a backseat to fundamental issues, and that change should allow multiples to increase. But belief in a more stable future will come slowly.

JA:  What should we look for in 2013 when we look at investments?

ML:  As small cap growth investors, we look for earnings growth.  But one of the great positives in this market is that there are many ways to make money in the market.  When I came into the business in the late 1970s, you could make get 7-8% returns several ways.  You could make money with yields –- those companies with no earnings growth offered very high dividend yields, say about 7%; those companies with earnings growth offered more modest dividends, say 2-4% dividends and 4-5% annual growth in earnings.  Growth stocks offered  very little in the way of dividends, but you could get capital appreciation as earnings would increase 10% to 15%.annually. Then, as we moved through the great bull market of the 1980’s and 1990’s, we got to the point where dividends were out of favor and capital appreciation was the only way to make money.. Now dividends are back and once again there are multiple ways to make decent returns in the stock market, depending upon one’s tolerance for risk..That is very, very positive for the equity markets.

JA: How about sectors?  Any of special interest, or any you would avoid?

ML:  There are good companies in every sector.  I would not recommend the utilities, but there are very good opportunities in materials, energy, consumer products and services, industrials and financial services,  In most of these the small caps usually have something unique about the way they do it, or the technology they apply to it.

Tech spending is not forecast to be up much in 2013.  There will be winners and losers.  We need to keep in mind that the corporate world is moving toward Software as a Service, which allows them to stop buying perpetual licenses, and to pay as they use software.  They are going from buying licenses and maintenance contracts, and now are basically paying just for what they use.  Same with cloud computing.  So they are going from spending $20,000 on software and a server to paying $1,000 month.  So even though tech spending is forecast to be close to flat, the companies that will be winners will have SaaS and cloud computing.  These trends will hold down spending.  It’s hard to see how the semiconductor companies are going to prosper in that environment, unless it is the specialty chipmakers who are specialized in populating ever-smaller chips with ever-larger amounts of circuitry for tablets and smart phones – or those companies that are specialized in the ability to manage the signals for those tablets and phones.  But other than those two, I don’t see a lot of growth there.  And I would be careful about traditional license-oriented software companies.  .

JA: What about healthcare companies?

ML:  Interesting.  It’s hard to guess how ObamaCare will play out.  There are some longterm secular trends in healthcare that are worth keeping in mind.  Keep your eye on the value proposition: better, faster, cheaper, more automated.  One of the most interesting areas is the second generation biotechs.  Think about AIDS, for instance.  Over the last 25 years it has become a livable disease – that is, we haven’t cured it, but we can make it possible to live with it, and to do well, not just to survive for a few more months.  Now the industry is working to make cancer livable in the same way; there are whole new classes of drugs that enable people to live with cancer, and not to just be blown away by it in a short time.  Possibly we are spending the same amount of money making cancer livable as we used to, but now we’re spending it over a longer period, and not all at the end of life.  Diabetes monitoring, for instance – the closer we get to continuous glucose monitoring, the better for diagnosis and treatment; One of our investments is Dexcom (DXCM), which has a promising technology for that.  All those big diseases are interesting, and medicine is getting its arms around them too.

JA: How about healthcare IT?

ML:  It has historically been mostly about billing and insurance, but now the future is to move on to quality of care.  Since we have had health insurance as a society, the focus has been on what you might call “industrial metrics,” such as how many patients you can process.  Now the quality of the outcome is more important, and best practices are more important.  There will have to be penalties for readmissions of the same patient.  Mobile apps for monitoring things like blood pressure, glucose, heart problems and blood gases – these things are going to become standard practice over the next 5 to 10 years.

JA:  You mentioned the impact of technology on industry.

ML:  There are lots of new beginnings now, along with outmoding of old things.  Software as a service and the use of the cloud – this is the biggest piece of cost to cut.  If you can cut your IT costs you have overall better margins, and better processes too.  And industrial automation is interesting too.  The first generation of automation concentrated on, for instance, lasers to cut steel.  Now automobiles are being made with lighter materials, so new lasers are needed, lasers to cut nonsteel materials.  Aerospace is an interesting area for this.  Two things that are driving aerospace are new materials that lower weight and cost, and a continuing cutback on oil-based materials.  There is a bit of a renaissance going on in aerospace.

One of our investments is IPG Photonics (IPGP) for the new lasers needed to deal with new lighterweight materials.  Another is Polypore International (PPO), which is making the membranes needed for new electric vehicles like the Chevy Volt and the Nissan Leaf. By the end of 2013, they are expected to be supplying membranes for 24 models of cars.  That goes back to the fact that fuel efficiency standards by 2025 will be at 54.5 mpg.

Another of our investments is Aspen Technology (AZPN), which basically supplies SaaS for factories and plants.  If you are a refinery, for instance, you are required by law to take your systems down every so often for maintenance and test for a number of things such as safety and pollution.  Doing that manually is difficult; it can be done, but it is hard, and if you are global it is harder.  Aspen automates all of that, and they are in a field by themselves basically.

JA:  And energy?

ML:  The shale revolution will be a big job creator, and the move toward natural gas for vehicles is important.  Fleets will be moving to Compressed Natural Gas (CNG), and we believe the infrastructure will be built out for CNG refueling.  Federal Express, UPS and the other big fleets will be the drivers.  We are interested in Westport Innovations (WPRT) for the CNG engines.  And we are watching Clean Energy Fuels Corp (CLNE) for the CNG supply chain, but big oil will be the installer.  We also believe solar will become economical to use, with panels on the roofs, for instance, of warehouses, and power being sold back to the grid when it is not needed.  Between the increased supply of natural gas, shale energy, coal, oil and renewable, we can get to be energy independent.

JA:  How about housing?

ML:  Housing is fascinating.  What happened with housing is what happened with autos.  Now after a period of low sales, we probably need as a nation to do some catching up.  We could need 1.7 million new housing starts for a couple of years.  That would double the current rate.  The Echo-boomers (who used to be called Generation Y) are starting to buy houses; their demand for houses is growing at 5% per year, and will grow at 10% per year soon.  My personal opinion is that this housing cycle will be a long one, similar to what we saw after the housing collapse in the mid 1970’s. In the first few years, we will see a catchup in pricing, but after that we believe housing prices will probably go up a couple of percentage points per year. If they implement the rules on mortgages that are being talked about, the housing market will become a lot steadier and more stable, more like the Texas market, where they tightened the downpayment requirement and favor 30-year-fixed mortgages.  That will be positive for the housing market and for consumer confidence.

There is nothing better for consumers than to have their biggest asset become more valuable every year.  Three years ago if you hadn’t already lost your job, you were still afraid you might lose it.  Your 401(k) and your house were devaluing.  This recovery is more like the late 1970s than the 1990s.  People got burned in the mid-70s and it took a long time to feel better.  When we are operating at full potential, we should have 3-1/2% to 4% GDP growth, and that will come eventually.

JA:  And in 2013?

ML:  I think GDP this year will be 2-1/2% overall because of federal and state problems, but corporate GDP growth will be a good bit better than that, assuming there is a budget deal at some point.  The first half of the year if we watch the government argue about spending, it could be a bit of a damper on growth.  If we regain faith that the politicians will be able to compromise and come up with some answers, the market will go higher.  Having our debt downgraded shook everyone’s confidence.    So the market is at 12-13 times earnings as a result.

If we get a budget deal we could get much stronger investor confidence, but in the short term, our ability to govern ourselves is the big issue.  Once that is resolved, the market will lift.

JA:  Thanks, Mary.

For AH Lisanti:  For financial intermediary use only.  Not for use with investing public.

The information provided should not be considered a recommendation to purchase or sell any particular security.  It should not be assumed that any security transactions, holdings, or sectors discussed were or will be profitable, or that the investment recommendations or decisions we make in the future will be profitable or will equal the investment performance discussed herein.  The views expressed reflect those of the portfolio manager as of 12/31/2012.  The portfolio manager’s views are subject to change at any time based on market and other various conditions. The performance reflected herein is not representative of performance of AH Lisanti individually managed accounts or comingled vehicles that AH Lisanti advises.

 

Business-Jet Market Expected to Show ‘Solid’ Growth in Short, Long Term

One business sector that is expected to be experiencing solid growth in both the short and long term is the business-jet market, according to The Economist (http://www.economist.com/blogs/gulliver/2012/10/business-aviation). Honeywell Aerospace recently put out its annual Business Aviation Outlook, a forecast based on surveys of 1,500 business-jet operators worldwide.

According to the survey (and The Economist), “between 680 and 720 new business jets will be sold this year, a ‘single

Photo courtesy of priog.org

digit’ increase over last year.” The survey then predicts will get much bigger over the next 10 years with about 10,000 jets expected to be sold at a total price of $250 billion.

The article notes that the good news for the business-jet industry is not so much a reflection of positive global economic conditions as buyers wanting the various new features offered in newer jets. Honeywell’s report indicates that today’s buyers want jets with more range, more comfort and larger cabins.

Other statistics in the article include regional numbers. A total of 46 percent of the buyers in BRIC countries expect to buy a new jet in the next five  years; the Russian business-jet fleet is expected to expand by 15 percent by 2017; the Indian and Chinese fleets by 18 and 30 percent, respectively. North America continues to lead the business-jet industry by a long shot “because of its massive installed base of jets…the region is expected to account for 53 percent of all sales in the next five years.”

On a related note, Lockheed Martin (LMT) hit a 52-week high Nov. 6, closing at $94.88.

There are a host of small cap stocks that work in the business-jet/aircraft industries. Here are a few randomly chosen companies to look at:

Wood Dale, IL-based AAR Corp. (NYSE: AIR, http://www.aarcorp.com) has a variety of aircraft-related businesses and does a lot of business with the US government. AIR sells and leases used commercial aircraft; repairs, leases and sells airplane parts, components and instruments;  provides logistics services, designs and installs in-plane cargo loading systems, just to name a few of its business sectors. AIR was founded in 1951. Its 52-week trading range is $10-$23.67. AIR closed Nov. 6 at $15.06, up 11 cents.

South St. Paul, MN-based Ballistic Recovery Systems (PINK: BRSI, http://www.brsparachutes.com) is tiny, only slightly over $1 million in market cap. It makes rocket-deployed parachute systems for general aviation and recreational aviation aircraft that are designed to parachute the entire plane to safety in the event of an in-air emergency. BRSI stock barely trades at all, averaging only about 3,900 shares a day. Its 52-week range is $0.05-$0.30. It traded 10,000 shares Nov. 6 and closed at $0.14, up 4 cents.

Portland, OR-based Erickson Air-Crane Inc. (Nasdaq: EAC, http://www.ericksonaircrane.com) manufactures and operates Erickson S-64 Aircrane heavy-lift helicopters. One side of its business maintains, overhauls, repairs and provides aircraft services, the other side uses its fleet to aide in firefighting, timber hauling and infrastructure construction. AIR has a 52-week trading range of $5.35-$8.50. It closed Nov. 6 at $7.49, up 3 cents.

Calabasas, CA-based National Technical Systems * (NASDAQ:NTSC; http://www.nts.com/) is a leading provider of testing and engineering services with the largest network of test laboratories and engineering service centers in North America and more than 50 years of experience.  The majority of its revenues come from the aerospace and defense industries. It also offers end-to-end unmanned aerial vehicle services. NTSC’s 52-week trading range is $4.22-$8.80.  Its market cap is currently almost $91 million. It closed Nov. 6 at $7.92, up 8 cents for the day.

Monrovia, CA-based AeroVironment, Inc. (NASDAQ: AVAV; http://www.avinc.com/) engages in the design, development, production, support, and operation of unmanned aircraft systems, and efficient energy systems for various industries and governmental agencies.  In late July, its market cap was $503 million and AVAV stock was trading for about $23. By early November it had not changed much. It closed Nov. 6 at $22.60, down 3 cents.

* Denotes client of Allen & Caron Inc., publisher of this blog.

Unmanned Aerial Vehicle (UAV) Market: It’s Taking Off

Unmanned Aerial Vehicles, or UAVs, or drones are making headlines daily, as part of military exercises or in a variety of other ways. The market for these vehicles has begun to grow and is expected to keep growing in the near future.

Shadow UAV photo courtesy of Wikipedia.org

 Market research estimates the global UAV market is now about $15 billion this year, with growth to up to $20 billion annually by 2020. Part of the reason for the growth is the FAA is opening up air space to commercial activities.

There are several high-profile, large cap companies such as Lockheed Martin and Boeing, active in this space. But so are many smallcaps, including:

Monrovia, CA-based AeroVironment, Inc. (NASDAQ:AVAV; http://www.avinc.com/) engages in the design, development, production, support, and operation of unmanned aircraft systems, and efficient energy systems for various industries and governmental agencies.  Revenue in 2012 reached $325 million with fully diluted earnings per share of $1.36, representing compound annual growth of more than 20 percent since 2010.  Its market cap is now $503 million and the 52-week trading range is $21.14-$34.28.  The stock has taken a beating lately and at the close of market July 24 was trading at $22.96, down 88 cents for the day.

Calabasas, CA-based National Technical Systems * (NASDAQ:NTSC; http://www.nts.com/) is a leading provider of testing and engineering services with the largest network of test laboratories and engineering service centers in North America and more than 50 years of experience.  It offers an end-to-end UAV service including the design and integration of a payload, help with building a POD, testing of UAVs, even flying missions.  The Company’s 52-week trading range shows it was trading for as low as $4.02 in November, but has been reaching new highs in the low $7s this month.  Its market cap is currently around $81 million. It closed July 24 at $7.12, down 1 cent on the day.

Carson, CA-based Ducommun Incorporated (NYSE:DCO; http://www.ducommun.com/) provides engineering and manufacturing services to the aerospace, defense, and other industries through a wide spectrum of electronic and structural applications.  Its capabilities include aviation and UAV sensors.  The stock is trading near the bottom of its 52-week range ($7.71-$23.54), and the market cap is around $105 million. It closed July 24 at $9.94, up 1 cent for the day.

Austin, TX-based Astrotech Corp. (NASDAQ:ASTC; http://www.astrotechcorp.com/), through its subsidiaries, has provided support for manned and unmanned launch vehicles for the last 30 years.  It is a leading provider of commercial aerospace services, and one of the first space commerce companies.  Its market cap is about $21 million and its 52-week trading range is $0.50-$1.34. It closed July 24 at $1,11, down 3 cents for the day.

Edgewood, NY-based CPI Aerostructures Inc. (NYSE:CVU; http://www.cpiaero.com/) is engaged in the contract production of structural aircraft parts principally for leading the U.S. Air Force and other branches of the U.S. armed forces.  As a subcontractor to leading defense prime contractors, the company delivers various pods, and modular and structural assemblies for military aircraft.  The Company’s 52-week trading range is $8.78-$16.42, and the market cap is currently about $75 million. It closed July 24 at $10.69, down 11 cents on the day.

Dulles, VA-based Orbital Sciences Corp. (NYSE:ORB; http://www.orbital.com/) develops and manufactures small- and medium-class rockets and space systems for commercial, military and civil government customers.  The company`s primary products are satellites and launch vehicles, including low-Earth orbit, geosynchronous-Earth orbit and planetary spacecraft for communications, remote sensing, scientific and defense missions; human-rated space systems for Earth-orbit, lunar and other missions; ground- and air-launched rockets that deliver satellites into orbit; and missile defense systems that are used as interceptor and target vehicles.  The market cap is currently about $739 million and its 52-week trading range is $10.59 to $18.48. It closed July 24 at $12.53, down 17 cents for the day.

* Denotes client of Allen & Caron, Inc., publisher of this blog

Business Services Are Enablers of Growth, Offer Value Opportunities

As the US economy begins to nose upward, and economic indicators seem to be showing more strength (unemployment at 8.3%, GDP growth speeding up), it is a good time to look at those companies whose job it is to enable businesses to grow, to bring new products to market, or to make their operations more profitable.  As a group, these companies are frequently referred to as Business Services, and they cover a long stretch of waterfront.  What they share is that they act as part of the infrastructure that businesses can call upon to help them move forward.  We will not be considering any accountancies — but they are an example of a Business Service.

Lightning simulation testing of a nosecone, courtesy NTSC

Philadelphia-based CDI Corp (NYSE: CDI; http://www.cdicorp.com/), for instance, provides engineering and information technology project outsourcing solutions and professional staffing services  in the US, UK and Canada.  CDI’s service is a wrap-around capability, offering business startup services (especially to medical-industry startups), a very broad range of engineering & design, head-hunting and personnel systems.  This sort of company allows its clients to “stick to their knitting” instead of worrying about administrative burdens.  For the third quarter of 2011 they reported revenues of $272 million, up nearly 10% from the previous year, with $0.15 per share of earnings, and a cash dividend of $0.13 per share.  Shares closed on Friday at $14.97 vs a 52-week high of $20.34, with below-average daily volume of about 40,000 and an overall market cap of about $287 million.  Because they are difficult to classify, these companies, in spite of good growth and good results, frequently suffer from neglect, and may well offer a deep value opportunity as a result.

Wilmington MA-based UniFirst Corp (NYSE: UNF; http://www.unifirst.com/) is in the uniform business, providing protective wear, flame resistant clothing, laboratory gear, coveralls — and cleaning services, including decontamination services for various toxic substances.  They also supply restroom supplies and first-aid cabinets to a dizzying breadth of customer industries.  Founded in 1936 during a deep economic downturn, UNF reported strong rebound revenue growth of 14.6% in their fiscal first quarter ended Nov 26, 2011, with $313 million and $1.30 per share in earnings.  The Q1 dividend is $0.0375 per share.  CEO Ron Croatti was a hirsute laborer in a recent episode of CBS’s “Undercover Boss,” and you can see the whole episode on the UNF website.  Shares are selling for about $61.61, near the top of its 1-year range, and average volume is about 58,000 shares — again, lower than one might expect, given how well the company is performing.  Market cap is about $1.2 billion.

Calabasas CA-based National Technical Systems Inc* (Nasdaq: NTSC; http://www.nts.com/) is an outsource for engineering services and testing products to find out how long they last, what makes them fail, how rugged they are, etc.  They do a lot of government and aerospace work (testing flight instruments and landing gear, for instance), but also work for the auto industry, telcom companies, energy suppliers and makers of consumer products.  With more than 50 years of experience, NTSC also helps clients with engineering expertise and supply-chain management, and certifies ISO standards compliance.  Even so, it is probably the only pure-play testing lab listed on a major US exchange, and it languishes as a result because they are a one-of-a-kind company.  For the first nine months of their fiscal year ended January 31, 2012, NTSC revenues increased to $115 million, up 6.2% over the previous year, and earnings from continuing ops were $0.03 per share.  A substantial book loss from closing a Canadian facility led to a net loss, vs previous-year “normal” earnings of $0.10 per share.  Like CDI and UNF, NTSC is largely invisible to the public, and its stock sells for about $5.00 vs a 52-week range of $4.02 – $8.00.  Daily volume is low, at less than 6,000 shares, but the float is small too, with insiders as major holders. Market cap is about $57 million, about a third of annual revenue, in spite of a robust base business.  Look at this video if you want to be impressed: http://www.nts.com/resourcecenter/multimedia#videodialog_10.

NYC-based Volt Information Sciences Inc (OTC: VISI.PK; http://www.volt.com/) is a sizeable company, with 4th-quarter revenues in the range of $473 million, up from the previous year.  They hit a speed bump and are having to restate financial results for 2008 and previous years, and have not reported audited results for 2009 or more recent periods.  There is a big ongoing restatement assignment for their accountants, but they have been giving quarterly “estimates” of what is going on.  They operate globally and their clients are mostly Fortune 100-type companies.  They provide outsourced IT, engineering and workforce staffing for projects or fast-growth companies and divisions.  They also provide IT services, and a lot of engineering and construction services, as well as infrastructure services like operator services, directory printing (like yellow pages), etc.  Clearly difficult to categorize as well as in a ditch due to accounting difficulties.  Even so, cash balances seem to be improving, which may be a good sign, and VISI shares are selling for $6.99 vs a 52-week high of $10.80.  Daily volume is paltry (16,000 shares), and market cap is $146 million, less than 10% of annual revenues, which may point to a deep value opportunity for investors with patience and healthy blood pressure levels.

Finally, look at Minnetonka MN-based G&K Services Inc (Nasdaq: GKSR; http://www.gkservices.com/).  Also in the uniform business, GKSR has  additional product lines for the workplace, including special-purpose floor coverings, such as traction mats and anti-fatigue flooring.  They also provide maintenance products and linens.  Not a very exciting business compared to biotechs with a cure for cancer, but GKSR has been doing what they’re doing since 1902, and they are scooting along with 7.4% growth for their second fiscal quarter ended December 31, 2011, reporting revenues of $217 million and EPS of $0.51 per share.  Last week they declared a quarterly dividend of $0.13 per share.  Not shabby, especially with the stock selling for $31.20 vs a year-high of $36.54 on volume of about 83,000 shares.  Market cap, in spite of great financial performance, is only $587 million, about 50% of revenue, and that’s with a dividend yield of 1.7%.

Please do your own research.  We do not make recommendations; we just write about interesting companies.

* NTSC is a client of Allen & Caron, the publisher of this blog.  We do not hold or trade NTSC shares.