Great Small-cap Success Stories — and They Aren’t in China!

by Mitchell Clark, B. Comm.

We’ve spent a lot of time lately musing about U.S.-listed Chinese stocks, and no doubt a number of these companies are worthy of serious attention. At the same time, however, I want to look at a few domestic companies that are doing well right now, both operationally and on the stock market.

As I’ve learned over the years, there are always great investment opportunities in a bear market and in a bull market. The certainty is always the fact that investor sentiment is never fluid, and that your expectations and time horizon for expected returns must change with the times.

One of the best things you can do in a recession or bear market in stocks is to develop a list of those companies that are doing well. As an investor, you want to know what companies are able to grow their revenues and earnings in a recession. You want to know which stocks are going up when the broader market isn’t doing much. Generating these kinds of lists is very helpful in trying to pick the best stocks in the marketplace. If a company is growing its business in a recession, then, in all likelihood, it will do even better when growth returns to the economy. If a business can outperform the rest of the marketplace when times are tough, the probability that it will flourish when times are good is much improved.

There are two great industries in America that are always worthy of investor attention. They are technology and healthcare. Both industries are related in their use of technology and both offer enormous room for innovation on the part of entrepreneurs.

Two companies stand out at this time as great success stories in these two respective industries. In healthcare, Quality Systems, Inc. (NASDAQ/QSII) is a company, based in Irvine, California, which helps automate medical and dental practices with new technology. As has been the case for a very long time, doctors and dentists continue to be one of the best target markets for any entrepreneur. They have the money and they don’t have the time. It’s the perfect target market for products and services that improve efficiency and streamline costs.

In its latest quarter ended June 30, 2009, Quality System’s revenues grew 21% to 66.6 million dollars. Net income dropped just slightly, coming in at 10.3 million dollars. This company has lots of cash in the bank, very few liabilities, and even pays a dividend of around 2.5%.

In pure-play technology, another standout success story is ArcSight, Inc. (NASDAQ/ARST). This company sells security solutions that help customers comply with corporate and regulatory policies, as well as protect hardware and software assets. Some of the company’s customers include: DISA (Defense Information Systems Agency), the U.S. Securities & Exchange Commission, Verizon, the U.S. Federal Reserve, McAfee, HealthSouth, Union Bank of California, Capital Blue Cross, and the U.S. Dept. of the Treasury. What I like about this customer base is that it is very well-heeled. The best customer to have in a recession is a government customer. As you know, government spending doesn’t tend to go down.

In its latest quarter, ArcSight generated revenues of 39.3 million dollars, up solidly from revenues of 29.4 million dollars generated in the same quarter last year. Net income was $4.3 million, as compared to a loss of $1.1 million. This stock is up some 150% since the beginning of the year and it’s no wonder — this company is growing in a recession.

I love finding growing businesses when the general economy is
weak. It’s a real accomplishment for any enterprise to grow during a recession. It’s also nice to know that you don’t have to go overseas to find growth. It’s always been here. The trick is always finding it at the right time.