(04/18/12) 3 Small Caps with Good Earnings Records

Not only are large, liquid market leaders earnings winners, but so are some of the little-known small caps. Here are three smaller stocks whose fundamentals and technicals indicate potential ahead, writes MoneyShow.com contributor Kate Stalter.

While charts are the most reliable way for timing buy and sell decisions, fundamentals have a big role in the stock screening process.

Some of this year’s top price leaders, such as Apple (AAPL), Chipotle Mexican Grill (CMG), Priceline.com (PCLN), Alexion Pharmaceuticals (ALXN), and Lululemon Athletica (LULU), have also delivered outstanding earnings performances in recent quarters.

The market is in a downturn, meaning that even the best stocks are pulling back. That also means that top fundamentals do not prevent a stock from showing a normal retreat after a prior run-up. However, the companies that continue to deliver solid, even better-than-expected earnings growth are the ones that attract institutional investors.

In addition to the high-profile growth leaders named above, a number of not-so-well-known companies boast a current blend of earnings and price growth. These are worth tracking during the market downturn, because that’s a winning combination that frequently results in a fresh uptrend after the major indices go back into rally mode.

Tessco (TESS) makes antennas for wireless transmission. The stock has advanced more than 86% so far in 2012, and reported a year-over-year profit gain of 55% in the last quarter.

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Tessco’s market cap is only $200 million, and it moves just 52,000 shares a day. The stock advanced 39% in March, with monthly volume coming in more than double February’s level.

Of course, because it’s so small and thinly traded, institutional ownership is sparse. As always, that makes a purchase riskier than a buy into a widely held blue chip.

Tessco is consolidating above its ten-day average, after pulling back from its all-time high of $26.53, reached on March 30.

As it clears that high, it could be a buy candidate, but remember a couple of caveats: First, the company reports earnings on May 2, so that could be a catalyst for a move in one direction or the other.

Second, despite solid market gains early in Tuesday’s session, the major indices are still in a correction, with a new rally not yet confirmed by heavy-volume gains. In that kind of market environment, new buys can turn south quickly.

Another relatively unknown name with a good chart and impressive earnings growth is IntegraMed America (INMD), which provides marketing, accounting, and clinical services to vein clinics and fertility clinics.

Up Next: The company's year-over-year earnings doubled...

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The company’s year-over-year earnings doubled last quarter, to 16 cents a share. Analysts see double-digit earnings growth this year and next. Revenue has grown in the low double digits in the past seven quarters.

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On the chart, IntegraMed is rallying to multi-year highs. It’s out of buy range at the moment, with the most recent technical entry point at $12.50, as the stock bounced off its ten-week average on April 9 in triple normal turnover.

In addition to organic growth, acquisitions are part of the company’s strategy. The company is in active growth mode, and has recently seen earnings increase, a reversal from a series of declines in 2010 and 2011.

It is expected to report its first quarter in early May, with analysts eyeing income of 11 cents a share on revenue of $71.56 million. Those would be year-over-year gains on the top and bottom lines.

Another under-the-radar small company with a good earnings record is Omnova Solutions (OMN), which makes chemical coatings for paper, floor coverings, and other products.

This is another company that is turning around its earnings performance after slipping a bit recently. It has remained profitable since 2009, but the rate of year-over-year earnings slowed in 2011.

Earnings came in at 22 cents a share in the first quarter, a 47% gain over the year-earlier quarter. It doesn’t report its second quarter until late June, so that will not factor in as a possible price mover for another couple of months.

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I have been tracking Omnova for several weeks, and it is now in a zone where it could be a viable buy candidate. It gapped higher at the open Tuesday, in tandem with a positive open on the major indices.

The buy point I was watching was $7.31. It cleared that price in intraday trading on Monday, and was hovering just below that level on Tuesday. The stock itself is a solid fundamental and technical performer at the moment, but as always with smaller names, risk abounds.

Omnova’s market cap is $336 million, and it trades 103,000 shares a day. This means it’s easier for one large holder to exit, sending everyone’s shares lower.

Traders or investors who enter a position in a small, think stock should be prepared to cut losses quickly. Determine a percentage below your buy point at which you will sell if the stock falls to that level, and stick to that trading discipline.

At the time of publication, Kate Stalter did not own positions in any of the stocks mentioned in this column.