Finding promising small-cap companies worthy of investment can be extremely difficult in any sector. Smaller companies are subject to bigger moves based on market forces, making them a more-volatile investment than larger, more established firms. And with the American healthcare system, and economy, undergoing what could be one of the most radical changes it’s ever experienced, opportunity for profit and disaster abound.
That’s why research analysts at Equities.com have created our Small-Cap Stars series. Factoring in dozens of different fundamental and technical criteria and gauging them against performance, we’ve highlighted certain companies we believe to have a relatively strong chance of outperforming the rest of the sector.
As always, the market outcomes are impossible to be sure of, but the Small Cap Stars series should give you a simple way to identify which small-cap companies have the most in common with other companies that have found success over the last year.
And one sector where this could be valuable is healthcare, where the Affordable Care Act could mean big changes in the way healthcare companies do business. Large segments are attempting to integrate, the market for digital health records is bigger than it’s ever been, and it’s possible that tens of millions of people are about to join the ranks of the insured, fundamentally changing their status as consumers. Exactly what this means to the sector remains unclear, and looks to stay that way for some time.
Still, the criteria developed by Equities for the Small Cap Stars are consistent with some of the most successful small cap health care stocks over the last year. They include:
- Enterprise Value/EBIT: This ratio is used to determine whether a stock is undervalued relative to its peers.
- Value/Book Value of Capital: This valuation metric examines a company’s balance sheet assets compared to its market value. A higher ratio implies higher valuation.
- Free-Cash Flow for the Firm: The amount of cash left over after all expenses are covered. Unlike other industries, a high metric may indicate a company is not investing adequately.
- Capital Expenditures: Higher capital expenditures mean that company is spending more to develop and grow its business, which is vital in the healthcare industry.
- Intangible Assets/Total Assets: In Healthcare, patents are included in intangible assets. Therefore, a higher ratio would indicate that the company has stronger future prospects.
Here’s a few of our small cap stars with the highest returns in 2013:
NuVasive, Inc. (NUVA) — San Diego-based medical device manufacturer NuVasive is up over 55 percent in 2013 despite a stumble after its July 31 earnings report. The company’s focus is on products used in the surgical treatment of spinal disorders, including the $4.2 billion spine fusion market.
PATHEON INC (PNHNF) — This pharmaceutical company is incorporated in Cananda, but its corporate offices reside in Durham, NC. Patheon gives contract development and manufacturing services for prescription and over-the-counter drugs to over 300 different biotech and pharma companies. The company’s on a roll in 2013, up over 70 percent in value.
Kindred Healthcare, Inc. (KND) — Louisville, KY’s Kindred Healthcare operates hospitals, nursing centers, and contract rehabilitation services across the United States. With some 551 facilities operating by the end of 2012, the company’s come a long way since it was founded as Vencor, Inc. in 1985. This year, the company’s stock has gained over 30 percent.