In case you haven’t had a chance to read the stock updates from each of the weekly Small-Cap All Stars articles, I have aggregated them all below for your convenience.

Value Portfolio

Brocade Communications Systems (Nasdaq: BRCD) saw the number of its shares sold short decline dramatically by 16.82%, which suggests that investors are growing more confident that the company’s turnaround is secure under new CEO Lloyd Carney. The company’s current short-to-float ratio is low at 4.1%, which earns it a safety point.

Buckle (NYSE: BKE) released an excellent fourth-quarter financial report that beat analyst estimates for both earnings and revenues. In the conference call, management said that it plans to accelerate the number of new store openings to 13 in 2013  – compared to only 10 new openings in 2012. Profit margins continue to rise – defying the skeptics. I love this company’s corporate communications because they are simply down-to-earth factual with no hype – just a quiet Midwestern confidence. Director Karen Rhoads outlined the company’s incentive compensation formula for managers, which is based on growth in comparable store sales, gross margin and pre-bonus, pretax net income. The company is simply a profit-maximizing machine! I’ve always been mystified by the stock’s high short-interest ratio and a recent article explains why the short sellers have been – and will continue to be – wrong in their bearish bias towards Buckle. In fact, the author believes the stock still has 40-percent upside!

Diamond Hill Investment Group (Nasdaq: DHIL) reported fourth-quarter financial results that beat revenue and earnings estimates of the one analyst following the company. Did I mention that I like investing in neglected companies?

Full-year revenues were up 4% and earnings per share were up 12%. For some reason, net client cash flows were negative but capital appreciation and investment income more than compensated and total assets under management rose 8.7% for the year. 

On March 8th, the company released its annual report, which includes its annual shareholder letter.  CEO Ric Dillon is optimistic about the future:

We believe that our growth and profitability last year was above average for our industry and much better than average for companies similar in size. My belief is that over the next five years, we will achieve better than average results for our clients, continuing to fulfill our primary corporate objective as a fiduciary to our clients with competitive long-term investment results.

On page 5, the annual report explains the slightly-worrisome net cash outflows that I mentioned last week as investor dissatisfaction with the company’s investment performance running below benchmarks:

Despite strong absolute equity market returns, the past three-year period has been a difficult one for many active money managers, including DHCM. Our equity strategy returns trailed benchmark returns over the same period; however, we remain focused on five-year periods to evaluate our results. Significant exposure to the energy sector across all of our equity strategies was the primary driver of underperformance relative to the benchmarks over the one- and three-year periods ended December 31, 2012. The energy sector was the worst performing sector in the market in 2012 as continued domestic oil and gas supply increases from hydraulic fracturing technology and weaker global demand for oil, driven by slowdowns in Europe and China, created headwinds for energy stocks. We believe this underperformance over the trailing one and three-year periods contributed to the flat and negative client cash flows in 2011 and 2012, respectively.

I take solace in the fact that the majority of cash outflows came from institutional accounts, which are notoriously fickle whenever investment performance is below the benchmark. Institutional cash flows are also quick to return when performance improves.

Momentum Portfolio

HMS Holdings (Nasdaq: HMSY) has sold off more than 10 percent since March 13^th when the Centers for Medicare and Medicaid Services (CMS) announced that hospitals could re-submit denied Medicare Part A claims (inpatient services) as Medicare Part B claims (outpatient services). Up to this point, hospitals’ only recourse when their Part A claims were denied was to file a costly and time-consuming appeal in the administrative courts. Investors are concerned that this new, streamlined procedure will allow hospitals to keep more Medicare money, which will reduce the contingency fee HMS receives from the government as a Recovery Audit Contractor (RAC) for recouped Medicare funds. But analysts at Wells Fargo Securities make a persuasive case that investor fears are overblown for the following reasons:

• Only 15 percent of HMS’ RAC contingency revenues are based on medically-necessary procedures that are improperly filed as Part A claims.
• Most of this 15 percent is rebilled anyway after successful appeals, so the only effect will be quicker rebills and not more rebills.
• HMS already has reserved 18 percent of its RAC contingency revenues for possible repayment, so this new procedure for rebills is already reserved and shouldn’t further reduce HMS’ financial results.
• the easier Part B rebill procedure CMS has instituted for hospitals could actually increase the frequency with which hospitals file questionable claims on Part A, which would actually increase the amount of fraud and generate more RAC contingency revenue for HMS.

HomeAway (Nasdaq: AWAY) is losing love from short sellers, which is a good thing for those investors who are long. Short interest decreased 14.6 percent during the second half of February and the company’s short-to-float ratio is now only 21.6 percent – still elevated, but moving in the right direction. I think short sellers are giving up because the company’s fundamentals continue to improve. Earnings growth is accelerating (up 100 percent in the fourth quarter) and sales growth has been over 20 percent in each of the past three fiscal quarters. According to Investor’s Business Daily (IBD), HomeAway is the top-ranked stock in the entire Leisure-Travel industry group. Technically, the chart is also bullish, with the stock breaking out of a cup-shaped basing pattern to the upside. 

Ocwen Financial (NYSE: OCN) reported excellent fourth-quarter and full-year financial results. Revenues blew away analyst estimates, but earnings were a bit light. Missing inflated estimates is okay in my book when earnings rise 85% for the year and the stock is trading at a forward P/E ratio under 8 and a five-year PEG ratio of only 0.23!

Similar to fellow Momentum Portfolio holding HomeAway, Ocwen exhibits very-high earnings quality with free cash flow much higher than net income for both Q4 and full-year — $220 million and $719 million vs. $65 million and $181 million, respectively. Good times should continue as the housing crisis is far from over and many more mortgage modifications are necessary. As Chairman Bill Erbey said in the conference call:

Ocwen continues to see substantial opportunities for both near-term and long-term growth. We are still in the middle rather than near the end of the opportunity that has been brought about by the mortgage crisis.

In the entire United States, the number of residential loans in default today is almost the same as the average for the last four years. This reflects the ongoing dynamic of roughly the same number of loans going into default as a result each month. The crash may have happened a few years ago, but the crisis will take much longer to cleanup than most expect.

In other news, the company agreed to pay $585 million for the mortgage servicing rights (MSRs) on $85 billion in mortgages owned by Ally Financial. This is a big win for Ocwen, which makes more money the larger its portfolio base of MSRs becomes. The deal is still subject to approval by Fannie Mae and Freddie Mac, but approval is likely and Zacks says: “For Ocwen, this deal will add to its already powerful growth trajectory.”

Ocwen also appointed Wilbur Ross to its board of directors. Mr. Ross is a self-made billionaire and respected value investor with substantial bankruptcy experience who owned mortgage servicer Homeward Residential before selling it to Ocwen in October 2012.

The stock dropped 6.7 percent on Tuesday (Mar. 19^th) in sympathy with fellow mortgage servicer Walter Investment Management (NYSE: WAC), which dropped more than 20 percent after releasing fourth-quarter earnings that missed analyst estimates. Walter also issued forward earnings guidance below estimates, blaming low interest rates and a higher rate of home-mortgage prepayments than previously expected. Ocwen investors that dumped the stock clearly overreacted for a number of reasons:

• A Sterne Agee analyst upgraded Walter to a “buy” rating after the earning report, characterizing the sell-off as “unwarranted” because “mortgage prepayments are expected to decline to more normal levels next year.”
• Credit Suisse analysts also dismissed the stock sell-off as an overreaction, stating that Walter’s underlying earnings power “has not changed meaningfully” despite the higher rate of prepayments.
• Walter is suffering from company-specific problems that have nothing to do with Ocwen. Specifically, in the post-earnings conference call, the company disclosed that it  has “a material weakness in certain internal controls” relating to accounting that resulted in a $4.7 million expense being improperly capitalized.

Ocwen’s price drop has triggered an IBD technical sell rule that requires stocks be sold if they fall more than 8 percent below its cup-and-handle buy point. Such mechanical stop-losses are ridiculous in my view because they  completely ignore the reasons for the price drop and treat an emotional investor overreaction to an unrelated company’s earnings report the same as significant fundamental news. The unwarranted price decline in Ocwen makes me want to buy more of the stock, not sell it. As Warren Buffett says: “price is what you pay, value is what you get.” Ocwen’s value hasn’t changed. The only thing that’s changed is that you can now buy Ocwen for a cheaper price.

Solarwinds (NYSE: SWI) received a reiteration of an “overweight” rating and an increased price target from JP Morgan – from $66 to $76.  The Wall Street investment bank explained its reasoning as follows:

SolarWinds has been the best performing stock in our coverage universe in each of the last two years (other than IPOs). While we’re happy to have been supportive of the shares during this period, we also don’t want to overstay our welcome. Software stocks are a volatile bunch and SWI has had its moments—but a unique approach to the enterprise software space and impressive execution has led to this success. In the context of future growth, CEO Kevin Thompson has emphasized that he believes SolarWinds can generate greater than 20% license revenue growth for the next three to five years and potentially beyond. Assuming that SolarWinds is able to meet this license growth, we believe that SWI shares are worth well in excess of the value it trades at today. Though it may not be the top performer in our coverage universe for a third consecutive year, the 29% upside to our target price of $76 reflects our belief that the stock should continue to outperform.

Western Refining (NYSE: WNR) announced fabulous fourth-quarter and full-year financial results that saw Q4 earnings up an astounding 190% and full-year earnings up 62%. Both Q4 earnings and revenues blew away analyst estimates. The company continues to benefit from very-wide crack spreads between Midland-sourced West Texas Intermediate crude oil and gasoline prices. Debt was reduced by $304 million and $323 million in cash was returned to shareholders in the form of dividends and share buybacks. More buybacks are likely in 2013. No wonder the stock in early March hit a five-year high!

The stock has recently jumped up and down on conflicting pieces of good and bad news. The good news is that the company is considering a spinoff of its oil pipeline and transportation assets into a tax-advantaged master limited partnership (MLP). Saving taxes increases value, as does unlocking a higher earnings multiple by separating out its high-growth refining business.

The bad news is that analysts are starting to reduce earnings estimates for refiners because of the federal government’s regulations mandating increased use of renewable fuels like ethanol in transportation fuel.  Macquarie downgraded some refiners who don’t blend their own fuel because they are forced to buy increasingly-expensive renewable fuel credits to comply with the law. Importantly, however, Macquarie didn’t downgrade Western Refining because Western Refining blends its own fuel and doesn’t need to buy these renewable fuel credits. So the news isn’t that bad after all, although you couldn’t tell that by the irrational price decline in Western Refining’s stock.