Large cap companies trounced their smaller rivals in the stock market during the 1980s and 1990s, as investors loaded up on brand names and blue chip companies during the greatest bull market the U.S. has ever seen. The S&P 500 returned 18% annually during the two decades, while the Russell 2000 small cap index clocked in at a still impressive 14% per year. The tables turned with the Internet bubble bursting in 2000 and the financial crisis later in the decade. The S&P was dead money between 2000 and 2010, while the Russell rose 79%. Yet, small companies have taken it on the chin over the last 12 months with the S&P outperforming the Russell 2000 by 14 percentage points.
Small caps present tremendous opportunities for investors with faster growth potential in many cases versus multi-billion dollar conglomerates. Each year Forbes looks to identify up-and-coming companies that have displayed strong, consistent growth in our feature on America’s Best Small Companies. Our 36th annual list highlights businesses that span the economy from aerospace to homebuilding to retail.
Our top 100 includes public companies with sales under $1 billion. They are ranked based on return on equity, sales growth and earnings growth over the latest 12 months, as well as the past five years. We also factored in stock market performance versus each company’s industry peer group during the past year (click here for a detailed methodology).
Technology and health care firms dominate our list, but the top spot is reserved for a company that capitalized on the fracking boom. U.S. Silica Holdings, founded in 2008, ranks No. 1 this year. The Frederick, Md.-based firm provides energy companies with the sand used in the hydraulic fracturing process to extract oil and gas from shale fields. Sales jumped 40% over the past 12 months to $680 million. CEO Bryan Shinn expects “frac” sand demand to double or even triple over the next few years. The high-flying stock has been hammered over the past month, down 40% on fears of a global oil glut, but it is still up 200% over the last two years. The stock currently trades at 11 times 2015 expected earnings.
Auto companies are increasingly adding features to their vehicles previously reserved only for luxury cars. One big beneficiary of the trend is second-ranked Gentherm THRM +6.02%, which makes heating and cooling systems for car seats for all of the big global automakers. Sales are projected to reach $811 million this year, up from $61 million in 2009. Analysts have cranked up 2014 earnings estimates 32% over the last six months for the Northville, Mich. company to a recent $1.93.
The 30-plus tech companies that made the cut are led by EPAM Systems EPAM -0.93%, which ranks third overall. The Newtown, Pa.-based company provides outsourced software engineering and IT services with significant operations in Eastern Europe. EPAM’s 32% annual sales growth has been fueled by acquisitions. Its latest targets were GGA Software in June and China-based Joint Technology Development in April. EPAM is a finalist for the implementation of a new system to be developed for the financial industry in response to SEC Rule 613. The system will serve as an audit trail to help regulators track trading activity with the contract expected to be awarded in 2015. EPAM’s stock has more than tripled since its February 2012 IPO at $12.
The stocks of last year’s best 100 companies finished on par with the Russell 2000 with both down 2% over the past 12 months. Top performers included Collectors Universe , Myriad Genetics and John B Sanfilippo & Son, which each returned at least 60% to investors. Another standout was last year’s top-ranked company, Questcor Pharmaceuticals . It was acquired by Mallinckrodt Pharmaceuticals in August for $93.60 a share, a 67% premium on the price from a year ago. Questcor specializes in treating multiple sclerosis through its main drug, Acthar. A buyout is the endgame for many fast-growing firms like Questcor. Other 2013 Best Small Companies that got snapped up include Annie’s BNNY +0.04%, Measurement Specialties MEAS +0.02% and OpenTable (see more on the 2013 graduates who were acquired or grew too big here).