Yesterday in "Google, But for Finding Great Stocks", I discussed the value of stock screeners as a powerful tool to find potentially great stocks.
I went through an example using one of the best free stock screeners on the internet FINViz.com and came up with two potentially great small cap stocks; MIND C.T.I. (NasdaqGM:MNDO - News) and Commtouch Software (NasdaqCM:CTCH - News).
I covered Mind C.T.I. last month in a daily article, Small Cap, High-Yield Israeli Tech Stock Primed For Growth. So, as promised, I will examine Commtouch Software today.
Commtouch Software Ltd., a Netanya, Israel based company with U.S. headquarters in Sunnyvale, California, makes anti-spam and virus detection products for enterprise customers. Commtouch was founded in 1991 but for most of its history operated as a standalone email and messaging provider. A shift in 2004 that focused the company more narrowly on anti-spam solutions led to a period of soft results and instability, from which Commtouch is now emerging.
Like most companies developing anti-spam products, Commtouch has managed to grow its business by constantly developing new products to keep up with the spammers' shifting tactics. It is now working on products to block so-called hijacked newsletter spam. Hijacked newsletter spam commandeers a popular email newsletter and attaches the spam image or the message at the top.
Save the aforementioned, the company's revenues have steadily grown from $1.5 million in 2004 to $18.2 million in fiscal 2010. After substantially shrinking its net loss in 2006, the company finally reached profitability in 2007. The company has been moving forward, steadily increasing revenues on a year-over-year basis.
On May 4th the company reported that first quarter 2011 revenues rose 34 percent to $5.5 million, compared to $4.1 million in the first quarter of 2010. The revenue growth came in higher that the industry average of 22.0%. Based on the trailing twelve months, the stock is selling at a discount to its peers with a P/E of 16.5 - below the industry standard of 19.3.
What I really like about this company is its gross profit margin. Profit margins are one of the most important numbers at your disposal to help analyze a company's performance. In the simplest of terms, margin analysis helps to gauge what it costs the company to make money. Commtouch has a gross profit margin of 83.2 percent, which is extremely high for its industry. Along with a high gross profit margin the company boasts a net profit margin of 31 percent - also above that of the industry average.
Investors that are able to find companies with high profit margins are benefitting from companies who are getting the highest profit for every product it sells, this usually indicates that the company is outperforming others in its industry. Profit margins vary from sector to sector, so I never compare companies from different industries. For example, a 12% profit margin in the auto sector is considered above average, while 12% in the software sector is below average.
Another positive for Commtouch - the company has zero debt. This is always a good sign for any company.
The company's guidance calls for earnings in 2011 of around $0.22 a share. If indeed the company meets expectations it would be the best year for Commtouch since its inception.
With a P/E below the industry standard, profit margins above industry standards and zero debt, Commtouch's stock represents an attractive potential investment.
As always, complete your own due diligence to make certain that a stock is right for your portfolio.