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4 Small Cap, Hidden Gems

 January 28, 2013 05:31 PM
 


by Jim Fink, contributing editor Personal FinanceI've uncovered four hidden gems that should thrive in the current global economic and political climate, and generate outsized returns for investors for years to come.

These stocks have passed my six-point "safety rating" system that steers us away from stocks exhibiting risky characteristics that histori­cally have led to problems down the road. Here's a look at PriceSmart (PSMT), Gentex (GNTX), Buckle (BKE) and United Therapeutics (UTHR).

[Related -Dividend Roundup: ALTR, BKE, CBRL, CECE, DFT, FDO]

PriceSmart

PriceSmart is the largest operator of membership ware­house clubs in Central America, South America and the Caribbean. It serves over 1 million cardholders at 30 warehouse clubs.

PriceSmart isn't just a Costco wan­nabe imitator; it was actually spun off from Costco (then called Price/Cost­co) in 1994. Former Price/Costco Chairman of the Board Robert Price has been PriceSmart's Chairman ever since.

The market cap is $2.2 billion, whereas Costco's is $44.1 billion. I'm not saying that PriceSmart will grow 20 times in value to equal Costco's market cap, but even a fraction of that catch-up growth will make current investors rich.

[Related -Insider Weekends – May 10, 2013]

Gentex

Gentex has a virtu­al monopoly on automatic-dimming car mirrors. Right now, these high-tech mir­rors are only installed in 23 percent of cars worldwide, but Michigan-based Gentex sees the global percent­age increasing to 45 percent over the next decade, which would mean $3 bil­lion in additional revenue.

Since the entire market cap is currently only $2.6 billion, the prospects for stock-price appreciation are tremendous.

The company is a true value stock, trading at only 16 times earnings when its historical five-year average multiple is closer to 26. The stock will most likely return to a 26 P/E multiple. With cur­rent earnings per share of $1.17, that would mean a stock price of 30 — more than 60 percent higher than the current level.

Buckle

The Buckle is headquar­tered in Nebraska and operates 440 ap­parel stores in 43 states, focusing on jeans and tops for those aged 15-30 years.

Chairman Daniel Hirschfeld and CEO Dennis Nel­son collectively own 40 percent of the stock. Therefore, manage­ment's financial incentives are aligned with the average shareholder.

The company pays an $0.80 regular annual dividend and has added a special dividend of at least $2.00 in each of the five years since October 2008, putting the stock's total dividend yield near 7 percent.

Buckle is extremely profitable with the highest operating margin in the ap­parel industry, returns on invested capital of almost 40 percent, and annual EPS growth of almost 15 percent over the past 10 years.

United Therapeutics

United Therapeutics focuses on the treatment of a relatively rare disease called pulmonary arterial hypertension (PAH). The 250,000 people worldwide who suffer from PAH have high blood pressure in the arteries of their lungs.

The global market for PAH treat­ment is roughly $4 billion in annual sales and UTHR currently has about a 15 percent overall market share. However, United Therapeutics is the market leader in treating severe PAH, with its Remodulin brand con­trolling 80 percent of the market.

Annual drug treatment costs for se­vere PAH can run upwards of $90,000 per year; United Therapeutics is a very profitable company despite serving a small patient base.

The firm has generated 25 per­cent compounded annual revenue growth — all organic — for ten consecutive years. It sells for only 10 times earnings, has almost $10 per share in cash, and last year earned a solid $3.67 per share.

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