Newport: Light at the End of a Tunnel

06/08/2011 12:47 pm EST

Focus: STOCKS

Charles Carlson

Editor, DRIP Investor

The maker of lasers and other photonic instruments is reasonably priced given its bright growth prospects, writes Charles Carlson in the DRIP Investor.

While I believe large-cap stocks represent the market’s sweet spot over the next 12 months, I would not ignore quality small and mid-sized companies. Indeed, having portfolio holdings across all shapes and sizes of companies is the best approach to generating steady returns over an extended period of time.

One small-cap stock that offers an interesting play in some exciting fields is Newport (NEWP). This provider of laser systems is seeing strong profit growth, which has helped the stock price rebound in recent months.

Still, these shares have shown the propensity to trade at significantly higher levels—the stock traded above $100 per share in 2000 and 2001. [Shares traded below $17 Wednesday—Editor.]

Investors looking for growth, and willing to accept volatility, should consider these shares.

Newport supplies lasers and photonics technology for the scientific research, life and health science, aerospace and defense, photovoltaics, industrial manufacturing, semiconductors, and microelectronics markets.

Demand for Newport’s products tends to be sensitive to macroeconomic conditions. Thus, given the depths of the recent recession, it is little wonder that the company suffered through two extremely tough years in 2008 and 2009.

The good news is that an economic rebound has rejuvenated the top and bottom lines. March-quarter sales and orders were records for a first quarter. Newport’s life and health sciences division was especially strong, with revenue rising nearly 27%, and orders increasing nearly 10%.

Per-share profits for the quarter more than doubled to 35 cents, or 7 cents better than the consensus estimate.

In the second quarter, the company anticipates increasing its sales between 12% and 15% and operating income more than 50% over the year-earlier period. For 2011 overall, the firm expects per-share profits to rise by more than 35%. The consensus earnings estimate for 2011 is $1.49 per share.

Newport provides an interesting way to play strength in technology and life sciences. The stock trades at 12 times the 2011 earnings estimate, not a big valuation given its expected growth.

To be sure, a slowdown in the economy would likely have an oversized impact on the company’s results. Still, the company has solid operating momentum, and the stock has been behaving quite well of late.

Newport has garnered impressive scores from our proprietary Quadrix stock-rating system, with an Overall score of 97, a Momentum score of 100, a Value score of 73, and a Performance score of 76 (all out of a possible 100).

Now, the stock is not for everyone—history shows you are probably in for a fairly wild ride with these shares. Plus, Newport does not currently pay a dividend. However, the stock fits a nice niche for investors looking to spice up a portfolio.

Please note that Newport offers a direct-purchase plan whereby any investor may buy stock directly from the company.

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