Barron's 400 Newsletter. Powered by: MarketGrader.com

  In its September 3, 2007 cover story introducing the Barron’s 400 Index (read here), Barron’s aptly described the new index as a collection of “America’s Most Promising Companies” and a “twist on growth-at-a-reasonable-price.” We couldn’t agree more and the results of the last six years clearly validate such labels. And while B400 regularly selects a healthy dose of blue chips that are well known to most investors, including names such as Microsoft, Wal-Mart, Amgen, IBM and Apple, which are among the companies with the most selections, a large part of the index’s growth attributes come from companies that are not household names; yet these are typically not only growth stocks but also companies with thriving businesses, solid profits and usually a story or two to tell, particularly in high growth areas of the economy. Today, and going forward following our semi-annual rebalance, we’ll use this column to introduce some of them to you. We’ll focus more specifically on the newcomers to B400, those that have been selected for the very first time to the index. Below are, thus, five members of the freshman class of September 2013, or the new kids on the block.   

1. Ubiquity Networks, Inc. (UBNT) – Market Cap: $3.46 billion

Categorized as a Telecommunications Equipment maker, Ubiquity Networks manufactures things such as routers, wireless stations, antennas and video surveillance equipment. While this is hardly the stuff of science fiction or even cutting edge technology, the company is disruptive in its pricing and the markets on which it focuses. For example, its EdgeMax router, about which the company boasts can handle 100 million packets per second, retails for $99. Its other products are similarly priced and this is perhaps what helps explain its tremendous growth, particularly outside North America. In fact, 74% of its sales come from outside the region.  Ubiquity Networks generated $111 million in free cash flow during the 12 months ended on June 30, on $321 million in revenue. At $1.75 million in revenue per employee, the company ranks third in this category among 78 telecommunications equipment companies; it ranks second in net income per employee, with $440,000 compared to the $10,000 peer average. The company’s 12-month trailing operating margin was 29%, also much better than its peers while it has no net debt since its $228 million in cash on hand is three times the $76 million in total debt on its balance sheet. The stock currently trades for 23 times the company’s 12-month forward earnings estimates.

2. Team Health Holdings, Inc. (TMH) – Market Cap: $3.16 billion

A provider of outsourced staffing services to the heath care industry, Team Holdings could potentially become a large beneficiary of the ongoing transformation in the country’s health care sector, especially if companies continue to delegate staffing services to third party providers instead of doing their own hiring. Team Health Inc. provides everything from physicians to nurses and office administrators in addition to also providing outsourced billing and collections services to clients that include hospitals, health care providers and emergency departments. The company’s revenue has grown by more than 50% in the last three years while net income has grown by two and a half times during the same period. It generated $94 million in free cash flow in the last 12 months on $2.24 billion in revenue, underscoring the nature of what is, in fact, a low margin business. The company nevertheless generated a 39% return on equity and 23% return on invested capital also in the last 12 months. Based on it current MarketGrader overall grade of 61, Team Health Holdings ranks fifth among 35 companies in the Services to Health Industry group. The stock currently trades at 22 times forward 12-month earnings estimates.

3. Apollo Global Management, LLC (APO) – Market Cap: $4.84 billion

Known as one of the largest private equity firms in the country, with $40 billion in assets under management, Apollo Global Management actually operates in three different segments: private equity, capital markets and real estate. Overall the company oversees $113 billion in client money and employs 660 people. Contrary to the previous company we profiled above, Apollo is definitely not a low margin business. In fact, the company generated $2.1 billion in free cash flow on $4.4 billion in revenue during the 12 months ended on June 30. It has generated, also in the same period, a return of 56% on invested capital, which includes total debt of $728 million; this, however, is dwarfed by the $1.2 billion in cash on hand on its balance sheet.  Apollo ranks fourth among 98 investment managers in revenue per employee, with a whopping $5.6 million, well ahead of the $1.6 million per employee industry average. The stock, which trades at 7.6 times trailing 12-month earnings, 10.9 forward estimates and 1.8 times tangible book value per share, also yields 6.7% based on the dividends paid by the company in the last 12 months.

4. Pioneer Southwest Energy Partners L.P. (PSE) – Market Cap: 1.74 billion

No list of promising U.S. public companies these days would be complete without an energy company with a foothold in the country’s ongoing energy revolution; especially if the company is structured as a Master Limited Partnership. Pioneer Southwest Energy Partners was formed by Pioneer Natural Resources (PXD) to own oil and gas properties in the Permian Basin of West Texas, one of today’s best know sources of domestic oil and natural gas that are propelling the industry’s growth. Through its ownership of approximately 1,200 wells in the aforementioned region, the company had proven reserves of 52 MMBOE (million barrels of oil equivalent), split into 85% liquids and 15% gas. As it continues to develop and operate these fields, the firm’s sole goal will be to distribute as much income as possible to its shareholders and its general partner or parent company. With this in mind, it should then be said that for an MLP like this one, it is all about the cash flow. PSE generated $97.63 million in cash flow in the 12 months ended on June 30, barely 1% below what it generated three years earlier. During the same time period revenue climbed 10% to $193.4 million. Also through June 30 the company paid $74.4 million in dividends, a five percent gain from a year earlier. During the same trailing 12-month period the company had almost $132 million in capital expenditures; its operating margin was 44%. The stock trades at 24 times trailing earnings and 20 times forward estimates, currently yielding 4.3%.

5. Ambarella, Inc. (AMBA) – Market Cap: $597 million

Based in Santa Clara, California, Amabarella produces high-resolution video compression and image processing semiconductors. It is, essentially, a chip provider to makers of high definition cameras and makers of HD TV broadcasting equipment. Its chips are also found in automotive cameras and security and surveillance cameras.  Ambarella generated $12 million in free cash flow during the 12 months ended on July 31 on $139 million in revenue. The company has also earned almost $18 million in net income during that same time period. During the most recent quarter its revenue grew by almost 35% compared to the year earlier period while its net income multiplied four-fold. It had 12-month trailing gross margins of 63% and operating margins of almost 17%. The company is debt free and carries $118 million in cash and equivalents on its balance sheet. The stock trades at 23 times trailing earnings per share and 20 times forward estimates.

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