Sodastream International Ltd (SODA) & Some Others Worth A Look

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Which stock to buy?

Here is a look at each of these small-cap companies by the numbers:

TREX SODA KKD LQDT PEGA
CAPS rating (out of five stars) 4 stars 2 stars 2 stars 5 stars 3 stars
Stock price $52.70 $54.98 $13.00 $33.08 $26.05
Market capitalization (in millions) $905 $1,119 $850 $1,104 $988
TTM P/E ratio 75.83 26.31 43.33 27.29 36.77
Analyst expected five year growth rate 20.0% 30.5% 25.0% 22.5% 25.0%
PEG ratio per Yahoo! Finance 0.87 0.70 0.86 0.78 0.84
TTM free cash flow yield 3.5% 0.3% 5.3% 1.5% 9.6%
Debt to equity ratio 0.62 0.00 0.10 0.0 0.0
Source: Motley Fool CAPS and Yahoo! Finance – May 6, 2013

On the surface, it would be easy to argue that none of these companies look particularly attractive based on trailing twelve month results. Other than Pega’s 0.5% dividend yield, none of the companies listed above pay a dividend either. However, it is important to consider a number of factors prior to rushing to judge a small cap based on trailing metrics.

For example, Trex’s record first quarter results also include short-term negative effects from the company’s “early buy program;” this program incentivizes Trex re-sellers to stock up on Trex materials to ensure adequate stock for the peak deck-building season; the incentives offered include discounts and favorable payment terms. This is a common practice in the industry and no reason for long-term concern, but it temporarily contributed to a $90 million increase in accounts receivable and $67 million increase in borrowings during the first quarter. The impact of this program has historically evened out during the year as cash is received and used to pay down debt.

Meanwhile, Sodastream International Ltd (NASDAQ:SODA) continues to invest heavily in its expansion into the United States and elsewhere in the world, resulting in minimal free cash flow generation as the company continues to drive revenue growth. As noted above, Pegasystems is facing top-line pressure as service revenue is facing double-digit declines as a result of IT spending cuts around the globe. Whether it is seasonality, investment in the future, or withstanding a tough IT spending environment, these companies are all continuing to build on formidable positions in their industries that are even stronger than trailing data may indicate.

For investors looking to make a long-term investment, a solid thesis can be made that each of these five companies has a good chance of beating the market given the expectation that each can grow earnings by at least 20% annually. It is important to remind anyone thinking about purchasing shares that small caps are quite volatile; there will be sharp ups and downs along the way, so patience and a long-term mentality are required. Additionally, small caps typically have elevated risk; for example, the loss of the DoD scrap contract by Liquidity Services would be devastating to the company’s growth plans (and stock price).

For my money, Trex and Sodastream International Ltd (NASDAQ:SODA) make the best case for long-term investment based on the sizable market opportunity and exposure to larger trends in consumer spending.

The article 5 Small Caps That Are “PEGged” for Success originally appeared on Fool.com and is written by Brian Shaw.

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