Small-cap stocks traded in the U.S. are on track to post their fourth straight record Monday.
And what’s been driving the group? Health-care companies. So we zeroed in on those that are increasing sales quickly while also improving profitability.
The Russell 2000 Index RUT, -0.08% keeps hitting records, but we’re narrowing our focus to the S&P 600 Small Cap Index SML, -0.05% because it is more selective. For example, among its criteria for initial inclusion in the S&P 600, the S&P Mid Cap 400 Mid Cap Index MID, -0.24% or the large-cap S&P 500 SPX, -0.24% S&P Dow Jones Indices requires the sum of a company’s most recent four quarters of GAAP earnings to be positive.
This “screening for quality” might lead you to expect the S&P 600 to underperform the Russell 2000, but that hasn’t been the case, as you can see from this 10-year chart:
Here’s a comparison of the performance for the two indexes for various periods:
| Total returns | ||||||
| 2018 through May 18 | 2017 | 3 years | 5 years | 10 years | 15 years | |
| S&P Small Cap 600 Index | 7% | 13% | 45% | 91% | 191% | 488% |
| Russell 2000 Index | 6% | 15% | 35% | 75% | 152% | 378% |
| Source: FactSet | ||||||
The small-cap prize
Here’s how the 11 sectors of the S&P 600 Small Cap Index have performed:
| Total returns - S&P 600 sectors | ||||||
| 2018 through May 18 | 2017 | 3 years | 5 years | 10 years | 15 years | |
| Health Care | 27% | 35% | 82% | 208% | 468% | 1,037% |
| Energy | 18% | -26% | -36% | -54% | -43% | 199% |
| Financials | 8% | 7% | 61% | 92% | 150% | 232% |
| Information Technology | 7% | 10% | 55% | 134% | 234% | 479% |
| Industrials | 5% | 17% | 45% | 92% | 165% | 602% |
| Consumer Discretionary | 4% | 17% | 22% | 64% | 198% | 302% |
| Telecommunications Services | 4% | 1% | 34% | 40% | -52% | -61% |
| Materials | 3% | 10% | 31% | 56% | 85% | 511% |
| Utilities | -2% | 19% | 60% | 94% | 240% | 598% |
| Consumer Staples | -3% | 9% | 29% | 79% | 318% | 645% |
| Real Estate | -9% | 6% | 19% | 27% | 103% | 262% |
| Source: FactSet | ||||||
The list is sorted by total returns in 2018. For all periods, the health-care sector has come out on top.
Considering the demographic trends of aging populations worldwide and the advances in medicine and technology, there’s no reason to believe the trend of increasing demand for health-related products and services is likely to end anytime soon.
One low-cost way to invest in small-cap health care is with an ETF that tracks this subset of the S&P 600, such as the PowerShares S&P SmallCap Health Care Portfolio PSCH, +0.15% which has a five-star rating from Morningstar and annual expenses of 0.29% of assets.
But you might also be interested in individual stocks.
There are 74 companies in the S&P 600 health-care sector. In order to take a careful approach in a first screen among this group, we ranked the companies by how much their sales per share had increased over the past 12 reported months (through May 18) from the year-earlier 12-month period. Then we pared the list further to only include companies that had expanded their gross profit margins over the same period. Here are the 10 that have increased sales per share the most:
| Company | Ticker | Sales per share - past 12 months | Sales per share - year-earlier 12-month period | 12-month increase in sales per share | Gross margin - past 12 months | Gross margin - year-earlier 12-month period |
| Corcept Therapeutics Inc. | CORT, +0.59% | $1.50 | $0.79 | 90.8% | 97.84% | 97.52% |
| Ligand Pharmaceuticals Inc. | LGND, -0.09% | $7.28 | $4.98 | 46.3% | 89.06% | 85.46% |
| Supernus Pharmaceuticals Inc. | SUPN, +2.88% | $6.26 | $4.38 | 42.8% | 94.71% | 94.35% |
| MiMedx Group Inc. | MDXG, -5.86% | $2.65 | $2.03 | 30.7% | 87.57% | 86.59% |
| Inogen Inc. | INGN, +1.68% | $12.67 | $10.00 | 26.7% | 49.93% | 48.43% |
| HMS Holdings Corp. | HMSY, +1.66% | $6.42 | $5.75 | 11.6% | 31.42% | 29.67% |
| Neogen Corp. | NEOG, -0.19% | $7.56 | $6.92 | 9.2% | 47.90% | 47.28% |
| Ensign Group Inc. | ENSG, +0.86% | $35.83 | $32.81 | 9.2% | 9.89% | 8.87% |
| CryoLife Inc. | CRY, -0.19% | $5.97 | $5.49 | 8.8% | 63.74% | 63.69% |
| Computer Programs and Systems Inc. | CPSI, +2.84% | $21.10 | $19.60 | 7.7% | 51.60% | 47.40% |
| Source: FactSet | ||||||
You can click on the tickers for more information about each company, including profiles, estimates, returns and ratings.
We looked at sales per share, rather than raw revenue, because the per-share numbers incorporate any dilution to shareholders from the issuance of stock to fund acquisitions or for any other purpose. The per-share numbers also bake-in any benefit from reductions in share counts when companies buy back shares.
A company’s gross margin is its sales, less the cost of goods and services sold, divided by sales. It does not include overhead expenses. The gross margin measures the profitability of the core business. If the margin is narrowing, it could mean a company is facing difficulty in defending its market share or that it is “stuffing the channel” by offering larger discounts to juice sales. It’s always good to see sales going up and the gross margin expanding.
Any stock screen has its limits. If you’re interested in any companies listed here, you need to do your own research and form an opinion on whether a company is likely to remain competitive over the long term.
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