Size Doesn't Matter When You Make Money

When BetterInvesting's investment clubs think small, they focus on companies with histories of growing sales and earnings rather than speculating on unproven firms. Bio-Reference Labs (Nasdaq: BRLI) and LKQ Corp. (Nasdaq: LKQX) lead the list of the club's favorite small and midsized companies.

We culled the information directly from the 6,300 transactions recorded during the eight weeks ended May 9 at myICLUB.com, our online accounting program. For the current purpose, we looked for companies that had at least twice as many buys as sells and had annual revenues of less than $6 billion.

Individual investors appreciate Bio-Reference Labs because it has had sales and earnings growing at rates exceeding 20% annually during the past 10 years. The clinical lab testing company's expansion has also been quite consistent, especially for a small company with 2010 revenues of only $458 million. Pretax profitability has risen in the past five years, with 2010 results exceeding the five-year average. The story is also positive for return on equity, with the company generally reducing debt levels.

Based on projections made using our online analysis tool, members are estimating future sales and earnings growth in the 15% to 18% range, less than analysts' consensus estimate of long-term EPS growth of 20%. They're also estimating the high P/E to reach between 25 and 30 in the long term, in line with recent history (though not a bargain).

Many of the other companies on the list have similar growth characteristics. I have to wonder, however, whether clubs are considering the valuation of such stocks as Rackspace Hosting (NYSE: RAX) and Lululemon Athletica (Nasdaq: LULU), both of which sport dizzying P/Es. Let's hope investors won't get Krispy Kremed if these companies report less-than-spectacular quarterly numbers.

(Winston-Salem, NC-based Krispy Kreme [NYSE: KKD] traded at $105 in late 2000. Today it sells for less than $8, the result of losses from an aggressive expansion plan. But in fairness, the company just reported strong earnings for the first quarter. Even better, it just announced it's giving customers a free doughnut at participating retail locations on June 3, National Doughnut Day.)

—Adam Ritt is the Director of Communications for BetterInvesting, a nonprofit association founded in 1951 consisting of individual investors and investment clubs. The clubs focus on investment education and providing information to help members become successful long-term investors.