Markets & Finance

Small Caps with Big Prospects


By Numer de Guia It's easy to see why investors have warmed to the small-cap sector this year. While the S&P SmallCap 600 index has gained 1.54% year-to-date through June 4, its large-cap counterpart, the S&P 500 index, has tumbled 9.4%.

But for small-cap investors, the inevitable question is: Can the outperformance continue? Are quality small-cap stocks still out there with good prospects to move even higher?

That's the thrust of this week's screen. We sifted through the stocks in the S&P SmallCap 600 index for those with S&P's top investment rankings of 4 STARS (accumulate) and 5 STARS (buy). Those rankings mean S&P analysts expect these stocks to outperform the overall market over the next 6 months to 12 months.

And now for the "quality" part. Of the 70-plus stocks that fit our first criterion, we looked for the 20 with the highest operating margins (as measured by their earnings before interest and taxes, or EBIT, as a percentage of sales). A strong operating margin -- how much of each dollar (in percentage terms) of sales is realized as operating profit -- can indicate fundamental strength in a business. It can also be a signal that a company maintains a superior competitive position vs. its rivals.

Here are the 20 stocks that made the cut:

Ameripath (PATH)

Ansys (ANSS)

Applebees (APPB)

Argosy Gaming (AGY)

Barra (BARZ)

Black Box (BBOX)

Chicos FAS (CHS)

ESS Technology (ESST)

Evergreen Resources (EVG)

Inamed (IMDC)

Mentor (MNTR)

Orthodontic Centers (OCA)

Patina Oil & Gas (POG)

Pharmaceutical Product Development (PPDI)

Renal Care (RCI)

Respironics (RESP)

Techne (TECH)

THQ (THQI)

Waste Connections (WCNX)

XTO Energy (XTO) De Guia is a portfolio services analyst for Standard & Poor's


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