Quant buys: Small and mid cap favorites

by Richard Moroney, editor Upside

Our quest for the best small and midcap stocks begins with our quantitative ranking system Quadrix®. By combining more than 80 factors from six categories into one Overall score, our Quadrix stock-rating system delivers meaningful outperformance while limiting volatility.

For our money, the most attractive stocks are superior on several fronts. Here's a look at three such stocks, all of which meet the following criteria.

• Overall scores of at least 96, ranking them among the top 5% of our research universe.
  
  
• Overall scores among the top eight in their industry group.
  
  
• Quadrix Value scores of at least 71, with an average of 80. All five earn above-average scores for the most effective valuation ratios.
  
  
• Quadrix Earnings Estimates scores of at least 61, with consensus estimates for current-year earnings revised higher by at least 4% over the last three months. All five posted healthy profit surprises last quarter — and seem likely to deliver higher current-year sales and earnings.
  
  
• Above-average Quadrix Performance scores. All five have delivered higher total returns than their industry-group average over the last 12 months.
  
  
  
• Cash-flow growth of at least 14% over the past 12 months. Rising cash flow makes it easier for a company to execute its business plan and sustain growth.

Actuant (ATU), a maker of hydraulic and electrical tools, earns scores of at least 96 for Quadrix Overall and both of our sector scores. The company, with leading positions in attractive niche markets, has impressive operating momentum.

Over the last 12 months, cash flow from operations jumped 65% to $203 million, while operating profit margin increased in four consecutive quarters.

Rising analyst estimates target current-year earnings per share of $2.08, up 24% on projected revenue growth of 12%. Over the next five years, per-share earnings are expected to increase at a 15% annualized rate.

The stock has rallied 20% this year yet is attractively valued at 14 times trailing earnings — 22% below its 10-year average and 10% below its industry-group average. Actuant is rated Best Buy.

CACI International (CACI), a provider of technology solutions, generates roughly 80% of sales from the Department of Defense. Management focuses on growing and well-funded programs, including intelligence, counterterrorism, and computer security.

Contract wins drive growth. Last month, the company was one of 13 prime contractors selected for an Air Force contract worth up to $985 million.

Per-share earnings were $1.45, up 25% and $0.02 above the consensus. But revenue rose less than 2% - below Wall Street expectations.

The company trimmed its full-year revenue guidance but affirmed its profit outlook, partly reflecting a sizable backlog. On March 31, the funded backlog stood at $7.65 billion, up 10% from a year earlier.

CACI tumbled on the news but remains a Buy based on its solid market position, modest valuation, and strong Quadrix scores.

Mitcham Industries (MIND), a leading lessor of seismic equipment to energy companies, earns the maximum Quadrix Overall score of 100, reflecting outstanding scores for Momentum (96), Quality (98), and Earnings Estimates (96).

The company is benefiting from increased global demand for seismic services and a trend toward higher-resolution surveys.

In the January quarter, equipment-leasing revenue jumped 87%, reflecting robust international demand, particularly in Latin America. An exclusive agreement with the company’s primary equipment supplier helps reduce costs and boost profit margins.

For fiscal 2013 ending January, consensus estimates project per-share profits will climb 31% to $2.60. Over the past month, the consensus for fiscal 2013 has jumped $0.24, while the consensus for fiscal 2014 has increased $0.76. Mitcham is rated Best Buy.

Learn more about this financial newsletter at Richard Moroney's Upside Stocks.

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