TrimTabs Money Blog

By Dan Dorfman

Dorfman And Dollars
Dan Dorfman follows the dollars and sense of the markets 

It’s a conspicuous occurrence on Wall Street, almost as commonplace as the air we breathe. Last year, they fizzled. So far this year, they’ve sizzled. And even more sizzle could lie ahead.

That’s a reference to smaller companies, as measured by the Russell 2000, and they  are far outpacing their larger brethren after falling 5.5% in 2011. The numbers detail their robust recovery. As of this writing, the Russell 2000, is off and running this year, racking up a nifty 9.7% gain in less than two months, more than double the 4.7% advance in the Dow and well above the 6.7% increase in the S&P 500.

“Small is beautiful again and it’s the place to be,” says David Wright, a sharp Midwestern investment adviser and dogged tracker of the small fry.

Further market outperformance by the smaller fry is what Wright sees ahead and it would be wrong not to give him a respectful hearing, given his background and his firm’s sizzling track record. Wright is the managing editor of Upside, an appropriately named monthly investment newsletter out of Hammond, Ind., that follows the fortunes of small and mid-cap stocks and boasts an enviable record in doing it.

For example, from May 28, 1999, through January 31, 2012, Upside’s buy list, the newsletter reports, has turned in major upside with an imposing gain of 345.5%, more than three-fold the 80.7% rise of the Russell 2000 in the same period.

Why greater outperformance by the smaller companies? Wright points to a likely faster rate of earnings growth than its larger rivals, (namely the Russell 1000 index, which features big stocks). For example, Wright says  that the Russell 2000 is pegged by Wall Street consensus to show earnings growth of 12.4% this year and average 12.6% annually over the next five years. In contrast, the Russell 1000 is projected to grow 10.4% and 11.7%, respectively, in the same two time periods.

Given Upside’s super stock-picking prowess, the obvious question: What are the newsletter’s favorite names?

Wright cites four companies, all rated buys by the newsletter and each of which, he believes, has the potential to generate a 15% to 20% return over the next 12 months.

These are not penny stocks. To the contrary, the prices of the four-some, by no means household or marquee names, range from roughly $49 to $59 per share and average market caps of about $2 billion. They’re all engaged in growing markets. Each is expected by Wright to generate double-digit earnings growth this year and price-earnings multiples, based on this year’s estimated net, range from 11 to 16.

Wright’s top pick is CACI International (CACI), which provides technology solutions to the defense, intelligence and homeland security markets and whose earnings are forecast by Wall Street to grow about 14% a year over the next five years. CACI’s management is focused on well funded programs in growing markets, such as surveillance, cyber intelligence, cloud computing and mobile applications. In its September quarter, the company was awarded contracts worth roughly $2 billion, with about 45% of them representing new business. In addition, as of  September  30 , CACI reported that it had submitted proposals for new business valued at more than $5 billion.

Rounding out the foursome, coupled with some comments from Wright, are:

Sauer-Danfoss (SHS), a leading maker of hydraulic equipment components used in heavy equipment and vehicles, which should benefit from urbanization in emerging countries and the growing need for infrastructure. For the nine months ended September, per-share earnings more than doubled on a 33% spike in revenue. Impressive operating momentum, a solid balance sheet and a cheap valuation qualify this stock as a buy.

Actuant (  ATU), a leader in hydraulic and electrical tools and specialized motion-control systems. Actuant boasts impressive sales and earnings momentum, with robust cash flow and solid returns on assets. Profit margins have trended higher, reflecting favorable pricing and an improved product mix. For fiscal 2012, ending in August, per-share earnings are expected to climb nearly 17% to $1.96, while revenue is projected to approach $1.6 billion, up 10%.

United Therapeutics (UTHR), a biotech company that focuses on niche medications for cardiovascular and infectious diseases. Profit estimates are trending higher, reflecting strong demand and potential share repurchases. In October, the company authorized a $300 million share buyback. For 2012, consensus per-share estimates have jumped to $4.02, up from $3.87 three months ago and 9% above estimated 2011 earnings.

Wright didn’t say it in so many words, but his reference to the newsletter’s four stock picks is pretty clear: If you’re looking for caterpillars that can turn into butterflies, here they are.

What do you think? E-mail me at Dandordan@aol.com