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3 Promising Stocks Overlooked by Wall Street

Tomorrow’s business headlines won’t be dominated by the companies listed below. They’re too small, and their shares are covered by only two to five analysts, vs. a median of 15 for the mostly large companies in the S&P 500 index.

Despite the limited attention they attract, or perhaps because of it, these companies boast attributes lacking in many big companies today. They’re highly profitable, with returns of at least 15% on the capital they invest. Their sales are up nicely compared with a year ago. These companies are financially strong, with little debt. They’re also attractively priced relative to their sales and profits.

Orchids Paper Products Company

Projected 2009 Sales Growth: 8.2%
Return on Invested Capital: 15.5%

When a maker of budget toilet paper is growing as fast as luxury goods sellers are shrinking, you know consumers are cutting back. Orchids Paper Products (TIS), based in Pryor, Okla., makes “parent rolls,” giant tissue rolls that are used to make toilet paper, paper towels, napkins and facial tissues. It also makes the finished products, which it sells under its own less-than-recognizable brands (Colortex, Velvet) or under store brands. The company’s chief customer base is among the best-performing segment in all of retail at the moment: dollar stores. Orchids is tiny but highly profitable and growing fast. Its sales are expected to climb 8% this year to nearly $98 million. Over the past year, it turned 17 cents of each sales dollar into operating profit, or six cents more than the average paper company. Shares of Orchids, which debuted in July 2005 at $5 and change (split-adjusted), sell for over $18 today but still seem cheap, at just nine times forecast 2009 earnings.

HQ Sustainable Maritime Industries

Projected 2009 Sales Growth: 4.1%
Return on Invested Capital: 16.1%

Tilapia grow quickly, aren’t picky eaters and tolerate (survive) being packed closely together in fish farms. They also yield more protein than they consume, unlike salmon or tuna. That makes them just about ideal, financially speaking, for feeding the world now that tastier wild species have been all but fished into oblivion. Seattle-based HQ Sustainable Maritime Industries (HQS) delivers tilapia and other seafood products to the U.S. and other markets from its farms in the South China Sea, where warm waters allow for year-round production. The company has a stock ticker market value of $112 million, and holds more than half that much in cash. Sales are expected to increase 4% to $70 million this year, with about 25 cents on the dollar currently turning into operating profit. Shares sell for just 11 times earnings.

EZCorp

Projected 2009 Sales Growth: 29.6%
Return on Invested Capital: 18.6%

Austin, Texas-based EZCorp (EZPW) lends money to customers who aren’t creditworthy enough to go elsewhere. It operates pawn shops, where customers put up items of value as collateral, and where shoppers buy items that borrowers don’t return for. It also operates payday loan stores, where customers can get expensive advances on their paychecks. Demand for both types of loans is up, but the payday lending business faces constant threats by federal lawmakers to reign in “predatory” fees, which can sometimes top 500% when calculated as an annual rate. (Defenders of payday loans argue that bounced check fees at banks can top 1000% when calculated as an annual rate against small account balances.) Shares of EZCorp have multiplied sixfold in value in five years, yet they still sell for less than 10 times forecast 2009 earnings. Regulatory risk might be more than priced into the stock ticker. EZCorp has expanded aggressively into Mexico in recent years, where regulators are less strict. Also, according to analysis by Henry Coffey, who covers the shares for investment bank Sterne Agee with a “Buy” recommendation, EZCorp is worth its current stock ticker price based on its pawn business alone.

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