matisse capital management

Small Cap Hunting - Part I

I have been searching for small cap stocks to balance out my holdings and have spent a lot of time running screens and looking at the better small cap funds.  I narrowed the results down to some consistently profitable small companies that have outperformed the S & P.  They are as follows:

Of these companies, I believe the best two are HSC and TTC - they appear to me to be slightly undervalued. Both provide a dividend (albeit small;) and have PEG ratios below 2.0.  Below is a chart of the performance of Harsco and Toro versus the S&P over the last three years:

   

Analysis Brief: TS - Tenaris S.A.

Luxembourg based manufacturer of steel tube products with a presence in most major oil markets.   1 ADR = 2 ordinary shares.

P/E = 14.8; PEG = 0.61.  At the current share price of $47.91 (3.3x sales) the stock is undervalued.  Value = $49.83 using 2006 actual EPS of $3.24, and $53.52 using the analyst 2007 consensus of $3.48 - discounted cash flow valuation using 15% increase in earnings each of next 3 years, 3% reversion growth and 12% discount rate (possibly high).  Revenue growth has exceeded 30% per year over the last four years. Dividend yield 1.3%, dividend paid annually in May.  ROE = 40.0%. Long term debt = 23%, $1.4 billion cash on balance sheet. Tenaris is the leading manufacturer and supplier of steel tubes for drilling and production of oil and gas. The company has contracts to supply Gazprom's needs through 2008 and a new PBR pipeline in Brazil.  TS currently manufactures 6mm tons of pipe annually. The company has factories in Italy, Mexico, Argentina, Japan, the US, Canada and Colombia.  In May 2007, the US company Hydril was merged into Tenaris.  Hydril is a Houston-based producer of pipe connections and pressure control products. At left TS is compared with GGB, Gerdau and DJIA over the last 3 years.  The shares have been listed on NYX for a little over 4 years. This analysis is not investment advice and readers should conduct their own research before buying any stock.

Analysis Brief: PBR - Petroleo Brasileiro

Brazil's national oil company, focusing on petroleum exploration and production, downstream, and sale and transportation of natural gas. 

1 ADR = 4 common shares.  P/E = 10.4; PEG = 0.42.  At the current price of $121.50 (1.79x sales) the stock is overvalued.  Value = $112.93 using 2006 EPS of $11.72, discounted cash flow valuation using 10% increase in earnings each of next 3 years, 3% reversion growth and 15% discount rate (S&P used 16%).  Dividend yield 2.9%, dividend paid three times per year.  ROE = 25.6%. Long term debt = 15.7%.  PBR is state-controlled but operates in a deregulated market.  Nearly 90% of the company's reserves are located in Brazil, with 4% in Bolivia and a smaller percent in Nigeria, which presents political risk.  The company also operates in Argentina, Angola, Colombia, Ecuador, Equatorial Guinea, Iran, Libya, Mexico, Paraguay, Peru, United States, Tanzania,Turkey, Uruguay and Venezuela.  Reserves are currently estimated at 15-20 years.  PBR missed its first quarter analyst EPS consensus by 25% on increased costs, a problem that is expected to persist through the rest of the year. Through its Petrobas subsidiary the company owns 6,785 service stations in South America. It is beginning to acquire companies internationally and recently bought a 50% position in a major refinery in Pasadena, Texas.  At left PBR compared with XOM and DJIA over the last three years. This analysis is not investment advice and readers should conduct their own research before buying any stock.