One of the best ways I know for finding good micro-cap stocks is to screen for high insider ownership, looking for those companies with at least 20%. One consumer goods business that meets this criterion is Massachusetts-based UFP Technologies (Nasdaq:UFPT), a manufacturer of interior protective packaging and component product solutions. In laymen's terms, they do really cool things with foam. CEO Jeffrey Bailly and the rest of the management team including the board own 25.1% of its outstanding shares. This matters because it represents commitment, something essential when growing a small business. Richard Bailly, Jeffrey's father, co-founded the company in 1963, a clear indication the business runs in the family. CEO since 1995, I believe the best is yet to come for Jeffrey Bailly and UFP Technologies. Here's why.
TUTORIAL: 20 Investments To Know

Innovate or die! The oft-used expression is forefront at UFP. A total of 46 engineering employees with an average of 12-years service at the company continually seek to produce the best designs, processes and materials possible to make its clients - many longstanding - delighted with the final product. With 28 active patents and more on the way, it's no wonder it's doubled sales in the past decade from $61 million in 2001 to $121 million in 2010. A direct result of this growth is excellent stock performance. In the past decade, its average total annual return was 25.4%, 2330 basis points higher than the S&P 500. Sure, there were bumps along the way, including four down years out of 10, but at the end of the day, this kind of performance can't be ignored and it's a perfect example of why investors shouldn't ignore micro-caps.

In 2010, its revenue grew 22%, split almost evenly between organic growth and growth through acquisitions. It spent $3.75 million in 2009 to acquire $4.6 million worth of assets from three struggling companies, resulting in an $840,000 gain. It gets better. The acquired assets were all part of its higher-margin component products segment. In 2010, those assets generated $11.6 million in revenue and operating profits of $1.6 million, which is a 42.7% return on investment. It will have recouped its money in two years or less. With $17.9 million in net cash (cash less total debt), it has plenty of capital to pursue a growth strategy that wisely incorporates tuck-in and complementary acquisitions. If 2009 is any indication of how it integrates acquisitions, investors should expect more to follow.

UFP Technologies and Peers

UFP Technologies (Nasdaq:UFPT) 4.86
West Pharmaceutical Services (NYSE:WST) 9.56
Graham Packaging (NYSE:GRM) 8.18
Graphic Packaging (NYSE:GPK) 7.52
Packaging Corp. of America (NYSE:PKG) 8.80

Latest Financials
Economies of scale are really starting to take hold at the company. In the first quarter, revenues grew by 9.8% to $31.5 million. That's good, if not spectacular, growth. Slow and steady is more than fine, especially when you consider it increased earnings per share by 46% to 32 cents from 23 cents year-over-year. How did they do it? It improved the gross margin and operating margin for the quarter by 190 basis points and 130 basis points year-over-year. Its operating margin for the entire 2010 was 11.9%. Expect it to be between 13 to 14% in 2011. If so, earnings per share should be $1.59, 16% higher than in 2010. Nice and steady.

Bottom Line
This is a perfect micro-cap in my opinion. It's not a one-hit wonder that'll flame out in six months. It's going to be here a decade from now, continuing to innovate and make money and likely with Jeffrey Bailly at the helm. What's not to like? (For related reading, also take a look at How To Evaluate A Micro-Cap Company.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Investing

    The ABCs of Bond ETF Distributions

    How do bond exchange traded fund (ETF) distributions work? It’s a question I get a lot. First, let’s explain what we mean by distributions.
  2. Stock Analysis

    3 Stocks that Are Top Bets for Retirement

    These three stocks are resilient, fundamentally sound and also pay generous dividends.
  3. Investing News

    Are Stocks Cheap Now? Nope. And Here's Why

    Are stocks cheap right now? Be wary of those who are telling you what you want to hear. Here's why.
  4. Investing News

    4 Value Stocks Worth Your Immediate Attention

    Here are four stocks that offer good value and will likely outperform the majority of stocks throughout the broader market over the next several years.
  5. Investing News

    These 3 High-Quality Stocks Are Dividend Royalty

    Here are three resilient, dividend-paying companies that may mitigate some worry in an uncertain investing environment.
  6. Stock Analysis

    An Auto Stock Alternative to Ford and GM

    If you're not sure where Ford and General Motors are going, you might want to look at this auto investment option instead.
  7. Mutual Funds & ETFs

    The 4 Best Buy-and-Hold ETFs

    Explore detailed analyses of the top buy-and-hold exchange traded funds, and learn about their characteristics, statistics and suitability.
  8. Mutual Funds & ETFs

    What Exactly Are Arbitrage Mutual Funds?

    Learn about arbitrage funds and how this type of investment generates profits by taking advantage of price differentials between the cash and futures markets.
  9. Investing News

    Ferrari’s IPO: Ready to Roll or Poor Timing?

    Will Ferrari's shares move fast off the line only to sputter later?
  10. Stock Analysis

    5 Cheap Dividend Stocks for a Bear Market

    Here are five stocks that pay safe dividends and should be at least somewhat resilient to a bear market.
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  5. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!