The “FedEx” of Small Caps?

For those who come up with investing ideas based on economic indicators, there is a relatively new metric that has evolved over the last 25 years or so, called the FedEx/UPS (NYSE – FDX, NYSE – UPS) indicator.

This idea is very simple: Improving business for these firms indicates increased economic activity, which serve as a leading economic indicator.

In our Goldman Guide this week we mentioned that Consumer Discretionary stocks should be solid in the near to intermediate term as some tea leaves have appeared thus indicating a slightly improving economy. We tie these two themes inherent in the Consumer Discretionary sector stocks with a proxy for overall business economy in today’s small cap pick.

UFP Technologies, Inc. (NASDAQ – UFPT - $22.34) produces and sells custom-engineered components, products, and specialty packaging solutions with exposure to a multitude of industries including medical, automotive, aerospace, and defense, and packaging markets in the United States. The Company benefit from an increase in industrial activity and a rise in the demand for high tech packaging solutions.

Some of UFPT’s financial metrics are quite noteworthy. For example, gross margin of 28% is substantially higher than the versus industry average of 24%. This is a great sign related to pricing and profitability as it indicates customers are willing to pay a premium for products and solutions from UFP Technologies. Additionally, operating margin of 11% versus 8% for the industry shows above average operating efficiency. Finally, a debt to equity ratio of 3.3 may not mean much in isolation, but total debt of only $3 million with over $33 million of cash on hand illustrates a strong balance sheet.

On the technical side, UFPT just crossed the 50-day EMA on what appears to be the start of another accumulation phase coming off a relative low. A short ‘float’ of just under 3% indicates that those going long may have a huge advantage. Finally, the valuation comparison of forward versus trailing P/E is a plus. The trailing P/E is 17x and the forward P/E is a cheap 14x.

We think UFPT is a great play on the overall economy and the consumer discretionary sector, in particular. Our near term target is in the upper $20’s.

Have a great day!

Disclosure: Goldman Small Cap Research analysts are neither long nor short these shares but may elect to purchase the stock within the next 48 hours.

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