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

Fresh Del Monte Produce (NYSE: FDP) reported strong second-quarter financials, with earnings up 11% and revenues up 7%, both of which topped analyst estimates. In the conference call, CEO Mohammad Abu-Ghazaleh attributed much of the growth to expansion in emerging markets: the Middle East, Turkey, and the countries of the former Soviet Union. All three major business segments of bananas, fresh-cut produce (except pineapples and melons), and prepared foods grew nicely. The company is buying back its own stock ($64.3 million worth compared to zero in the year-earlier quarter).

Analysts upgraded Fresh Del Monte after the Q2 report and the stock subsequently hit a five-year high on news that competitor Dole Foods is being taken private at $13.50 per share, which values Dole at an EV-to-EBITDA ratio of 11.5. Since Fresh Del Monte is currently valued at only 8.1 times EBITDA, the company could see a takeover premium of more than 40% if an acquirer were to value the company similarly to Dole.

FutureFuel (NYSE: FF)’s second-quarter earnings more than doubled and revenues were up a more modest 3%, but both figures beat analyst estimates. In the conference call, President Lee Mikles characterized the second quarter as a “record quarter for financial performance.” Investors liked the news, sending the stock up 6% on August 9^th.  Biodiesel is the definitely the growth driver for FutureFuel right now, which is benefitting from government subsidies like the $1 per gallon blender’s credit and the Environmental Protection Agency’s renewable volume obligation (RVO) rule.

Since the blender’s credit may not be extended beyond this year, the RVO rule is becoming more important and investors are hoping that the EPA will significantly increase the RVO for biodiesel from 1.28 billion gallons in 2013 to 1.8 or 1.9 billion gallons in 2014 – a development that President Mikles said “would be extremely positive for the business.” Although the EPA has not yet decided the RVO for 2014, one analyst is confident that the biodiesel component will not be reduced because of “in light of the Obama administration’s 5-year record on the subject of green-house gas emissions.” Wedbush raised its price target on FutureFuel to $20, which signifies more than 18% upside from its current stock price.

GrafTech International (NYSE: GTI) reported weak second-quarter results with earnings down 86% and revenues down almost 5%, yet the stock barely reacted because the company matched analyst earnings estimates and actually beat on revenue! Forward guidance for full-year EBITDA and cash flow from operations was reduced.  Moody’s affirmed the company’s credit ratings, but warned that things need to get better soon or a downgrade could occur.

Reason? Steel products make up 75% of GrafTech’s business and the global steel industry remains in a deep recession and there is a glut of graphite electrodes thanks to Chinese entrants, resulting in a sharp drop in selling prices midway through the second quarter. As CEO Craig Shular said during the conference call:

I don’t know if it’s the bottom yet. I know many producers are struggling. They are reporting their numbers. Chinese producers are losing a lot of money. The economics in the industry are very-very stressed. So time will tell. I think big picture, looks like the rate of decline in the EU is starting to slow. So it looks like that EU is trying to find a bottom. That’s about 35% of our sales. So that would be a key part to recovery. U.S. is better for sure; probably our best steel market has been in the U.S. But even that’s not without challenges. And then of course you have seen, everyone has seen that China slowed down. So I don’t know if this is the bottom. I think bottoms we always see in the rearview mirror.

So our team is continuing to drive productivity improvements, costs out of the door, a lot of quality improvements. When we do emerge from this trough, we have got four great acquisitions. They are integrated. Our cost structure will be much better. Our product offering would be much broader. Engineered Solutions will have the girth to be a nice profitable growth business. When the economies really do recover for the steel sector, you will see us well positioned to beat all of our historic financial numbers.

Things currently appear gloomy, but that is almost always the case with deep value stocks and I’m convinced that all of the bad news is already priced in. After all, GrafTech has gained almost 13% since joining theRoadrunner Value Portfolio despite the worsening steel-industry problems! 

Let’s remember that the Engineered Solutions division (25% of company revenues) is going gangbusters, achieving record sales in the second quarter.  One thing is certain: the steel industry will recover at some point and GrafTech will be one of the survivors given its strong balance sheet and leading market-share position in graphite electrodes. When the recovery occurs, watch GrafTech fly!

United Therapeutics (Nasdaq: UTHR) reported excellent second-quarter results, with earnings before non-cash charges up 31% and revenues up 24%. Both figures easily beat analyst estimates. All three of the company’s primary drugs – Remodulin (+13%), Tyvaso (+35%), Adcirca (+45%) – produced double-digit revenue gains. Management re-affirmed full-year guidance of $1 billion in revenues which appears easily achievable given that first-half revenues are already $525.7 million.

The conference call may have been one of the most optimistic I have ever listened to. CEO Martine Rothblatt stated:

The company’s stock price is at its all-time high. Our revenues are at their all-time high. Our profitability is at its all-time high. Our pipeline is at its all-time best perspective, with the implantable pump queued up for beta release this summer. And if successful, in the words of many pulmonary hypertension providers: implantable pump can double the number of patients using Remodulin. So that’s — if you take a look at the Remodulin revenue run rate and you double that, that’s a beautiful thing to be coming out of the pipeline right there, upwards of $0.5 billion a year in revenue potential. Tyvaso continues to grow.

We have a new Phase III trial involving Tyvaso with add-on therapy that, if successful, augers for a doubling of Tyvaso usage. Tyvaso is closing in on a $500 million revenue run rate and probably be there in a couple of years, if not sooner. And so another doubling of that is another $0.5 billion coming out of our pipeline. And then we have the very exciting news about the continued progress of oral treprostinil at the FDA. This is the drug that — for so many people, the pulmonary hypertension field has been the holy grail of pulmonary hypertension: the convenience of a pill. And the market forecast for that particular modality is actually double the ones that I just gave a few moments ago. So all told, never before has our pipeline been so mature with about $2 billion in revenue potential, on top of the $1 billion, that revenue run rate that we’re putting out to date.

Best of all times at United Therapeutics. We realize that we’ve got twice as good a future in the next few years as the very good position that we’re at today.

Just to reiterate what Rothblatt said: even though 2013 is shaping up to be the best year in United Therapeutics’ history with $1 billion in sales, the near-term future could see $3 billion in total annual revenues:

1. Doubling of Remodulin sales with approval of implantable pump = +$500 million
2. Doubling of Tyvaso sales as a combination therapy  = +$500 million
3. Approval of oral Remodulin = +1.0 billion

Curiously, many brokers’ opinions towards United Therapeutics remain lukewarm despite all of the good news. I actually find this encouraging since these same brokers have been dead wrong for quite awhile and failed to predict the stock’s outperformance so far this year. A contrary indicator if I’ve ever seen one! The brokers’ caution is based on fears of increasing generic competition for both Remodulin and Adcirca. Such fears are misplaced.

First, United Therapeutics is suing Sandoz, the generic drug division of Novartis, for attempting to infringe the Remodulin patent. A “Markman Hearing” on the patent infringement case occurred in May and the judge issued his ruling on June 25^th on how words in the Remodulin patent should be interpreted. According to CEO Rothblatt, the judge’s ruling “could not have been better.” The patent trial is expected to start in mid-2014 and right now it looks like United Therapeutics should win easily. Second, Pfizer’s Revatio (PAH version of Pfizer’s erectile dysfunction drug Viagra) has lost patent protection and low-priced generic versions of sildenafil are competing against Adcirca (PAH version of Eli Lilly’s erectile dysfunction drug Cialis). Despite sildenafil’s lower cost, Adcirca is kicking its butt!  According to CEO Rothblatt, Adcirca is now administered to more than half of all PAH patients. Never before has any PAH drug broken the 50% market-share barrier – until Adcirca accomplished this feat during the past six months:

Adcirca is on a strong road. We have seen no effect of generic sildenafil on us. Nor would we because they’re two completely different drugs: One you have to take a drug three times a day (generic sildenafil) — missing doses is problematic because the disease can claim more pulmonary vascular space due to poor compliance. Dosage of our Adcirca is just once daily, and it doesn’t get much better than that.

Bottom line: even after the stock’s huge run this year, United Therapeutics could double or triple over the next 3-5 years. For more detail, two recent positive articles can be found here and here.

Momentum Portfolio

CommVault Systems (Nasdaq: CVLT) reported excellent first-quarter financials that saw earnings up 29% and revenues up 21%, blowing past analyst estimates for both. CEO N. Robert Hammer said the company’s success is:

driven by continued demand for our Simpana 10 data and information management software platform and excellent results from our services organization. Our first quarter revenue and earnings performance continues to validate our market leadership and technological innovation combined with our operating discipline.

In the conference call, management said the macro environment is “improving” and the second half of 2013 should be “better” than the first. The stock jumped 10% in a single day and hit a new all-time high. With new highs, CommVault’s price correction that started in March is now officially over, short sellers have given up, and the stock’s positive momentum has reasserted itself.

Darling International (NYSE: DAR)  hit an all-time high on August 5^th, but sold off a few days later by 5% when it announced second-quarter financials that reported revenue down 3% and earnings down a whopping 29% from the year-earlier period. Both figures missed analyst estimates. Despite the miss, CEO Randall Stuewe called the results “solid” and I agree with him because the earnings decline was caused by startup expenses and $2.0 million in deferred profit related to the Diamond Green Diesel (DGD) joint venture with Valero Energy. With DGD now operating and expected to reach full production capacity by mid-October, Darling’s future is brighter than ever.

Other causes of the earnings decline also are related to important investments that will produce higher growth in future quarters: (1) installation of an Oracle enterprise resource planning (ERP) database system; and (2) acquisition of Terra Renewal Services, which recycles industrial residuals and used cooking oil (returns on investment could hit 30-40%).  In the conference call, management called the pending Terra acquisition, which is expected to close by the end of August, “very exciting.” Even after the recent price sell-off, Darling has gained 8.7% since being added to the Roadrunner Momentum Portfolio, and I expect this second-quarter pause to be followed by explosive growth in coming fiscal quarters — similar to the current success of FutureFuel.

On August 23rd, the company announced yet another acquisition — the largest recycler of animal by-products in Canada, no less! Darling will pay CAD$645 million (US$615 million) for Rothsay, a subsidiary of consumer packaged foods manufacturer Maple Leaf Foods. Rothsay operates five rendering plants in three Canadian provinces as well as a biofuel factory in Quebec. According to Darling CEO Stuewe, the Rothsay acquisition will increase the Darling’s animal-fat availability by 15% and create “North America’s leading provider of independent rendering and recycling services.” Investors cheered the news, sending Darling’s stock up as much as 14.9% intraday. The analysts at Canaccord Genuity liked the deal also, upgrading its rating to “buy” and increasing its price target on the stock to $25, stating:

The acquisition of Rothsay marks another key milestone in Darling’s growth strategy, with the company deepening its footprint in North America while improving supply-side visibility and further de-risking the story now with DGD operational. Management has pulled-off bigger deals with no issues (leverage still remains low) and we like the aggressive approach here.

HMS Holdings (Nasdaq: HMSY) reported second-quarter financials that saw revenues up a modest 4.8%, which was good enough to beat analyst estimates, and earnings down 13%. The company re-affirmed its previously-reduced full-year guidance for fiscal 2013. CEO Bill Lucia explained that 2013 is turning out to be a transitional year for the company as regulatory delays, government contract re-bidding, and healthcare restructuring increase investment expenses and postpone client payments:

We are in a dynamic healthcare environment, as Medicaid lives shift rapidly to managed care and implementation of the Affordable Care Act proves increasingly complex.

The good news is that 2013 is the trough of the cycle and 2014 is shaping up to be a stellar year, with almost all regulatory uncertainty resolved and business ready to ramp.  In the conference call, Lucia said increased Medicaid recovery audit contractor (RAC) business is softening the revenue slowdown from the rebidding of Medicare RAC work:

While our current financials don’t reflect historical growth rates, the investments we’ve been making position us to achieve stronger revenue growth and margin expansion in 2014 and ’15.

We have significant opportunities in all of our markets, and we anticipate that we’ll see the impacts of these opportunities in 2014 and beyond. One of the most significant outcomes from the Affordable Care Act is the growth of the Medicaid program. That growth is on track with 23 states planning to expand their Medicaid populations and 5 more leaning toward expansion. That’s more than 5 million people expected to enroll in Medicaid with most of those flowing through our technology and service platforms by late 2014.

This volume increase will have a positive impact on both our Coordination of Benefits and Program Integrity businesses. 16 of the 29 Medicaid RAC contracts are now in production, and 13 are in the implementation process. By this time next year, we will benefit from full implementation at our Medicaid RAC contracts, and we’ll have much better insight into the long-term growth potential and margin contribution from that segment.

We are better positioned than any of our competitors to expand our footprint in this market. We anticipate revenue from RAC and RAC-like services ramping up in the second half of this year, and margins starting to ramp in 2014.

The new Medicare RAC contract (15% of total company revenues) should be finalized in September or October. Until then, HMS received some good news from the Centers for Medicare & Medicaid Services (CMS), which has extended the time period under the old, expiring Medicare RAC contract for requesting medical records for audit by 4 ½ months — to November 15^th from June 30^th. More medical records examined, more money recouped and larger fees for HMS! The company’s reduced full-year guidance for 2013 may prove overly conservative based on this beneficial contract modification.

Ocwen Financial (NYSE: OCN) reported second-quarter results that were simply awesome. Normalized earnings were up 130% and revenue growth was even better at 151%, hitting a record high. Both numbers easily beat analyst estimates. According to Ocwen Chairman Bill Erbey, the great results are nowhere near a peak and more growth is to come:

We are pleased with Ocwen’s strong core earnings and cash flow which should continue to grow with the boarding of our new acquisitions. Ocwen’s recently announced acquisition of OneWest Bank’s $78 billion servicing portfolio combined with other large bank transfers points toward continued growth as banks strategically reposition their mortgage servicing operations. 

As for the effect of higher interest rates, Erbey said that higher rates could actually benefit the company because fewer homeowners will want to close out loans by refinancing. Higher interest rates also reflect a stronger economy, which will help employ subprime borrowers and make it more likely they can repay mortgage loans:

We believe that higher interest rates will have little negative impact on earnings, as we have only a modest component of income related to originations, and assets and debt are match funded. Higher employment and an improving housing market, on the other hand, should boost Ocwen’s earnings. The majority of Ocwen’s earnings come from our non-prime portfolio which produces higher earnings as employment and home price improvement result in lower delinquencies.”

In the conference call, Erbey dismissed skeptics who believe the company cannot keep up its torrid rate of growth:

For over 10 years, every time Ocwen has executed a large transaction, some industry observers have speculated that it will be our last and that we will just be a melting ice cube. This is like being one of the few businesses that has a predictable, recurring revenue stream extending at least a decade.

At the end of June, our servicing portfolio was $436 billion. In addition, we’ve announced or expect to close on at least another $90 billion in new MSRs or subservicing rights in the second half of this year. More importantly, we continue to see a sizable pipeline of potential opportunities. We currently have a pipeline of $400 billion, which is up from last quarter, despite eliminating the deals we recently won. Note that the actual volume of deals we are pursuing is much larger. Our pipeline reflects a realistic assessment of what we believe will come to market and what we believe we can potentially win. Moreover, we continue to believe the overall size of the opportunity is at least $1 trillion over the next 2 to 3 years.

Large banks continue to exit the subprime mortgage business and will be selling mortgage servicing rights (MSRs) for years to come. Wells Fargo CFO Timothy Sloan said in July that the biggest U.S. home lender expects to sell more MSRs in the next few quarters and in August Wells announced that it was cutting 2,300 mortgage jobs due to fewer loan refinancings and originations. Wells’ pain is Ocwen’s gain.

Lastly, CFO John Britti pleasantly surprised investors during the conference call when he suggested that Ocwen may soon initiate a large stock buyback program:

We will soon reach a point where we can both fund growth and return cash to shareholders through a stock repurchase program. Were we to execute such a program, we are confident we could repurchase at least $900 million of stock without generating any adverse tax consequences, and we expect that number to grow over time.

Bottom line: A $1 trillion opportunity means that Ocwen could theoretically triple its business in the next couple of years. Combined with likely stock buybacks, there is no reason for investors to get off this train.

SolarWinds (NYSE: SWI) reported second-quarter results that demonstrated strong year-over-year growth of 21% in both earnings and revenues. Although earnings beat estimates, revenues missed slightly.

So why did the stock plunge more than 22% on the news? The key metric for SolarWinds is revenue growth from new software licenses (40% of total revenue), and new-license growth of only 5.7% disappointed for the second-consecutive quarter and was further deceleration from the 12% new-license growth in the first quarter. Even worse, in the conference call management forecast third-quarter new-license growth lower still at only 1% to 5%.  This deceleration is startling given the 34% year-over-year new-license growth that occurred in 2012.  According to CEO Kevin Thompson, the problem is not the market opportunity but the company’s sales execution:

While we addressed a number of strategic and operational items during the second quarter that we believe will positively impact our future results, our license sales results did not meet our expectations. To be direct, we’re simply not getting the job done in stepping in front of the existing level of demand to the market for solution to network performance issue. We believe that addressing this opportunity is a matter of returning to the high level of execution we operated at throughout 2011 and 2012

Our confidence in our core business is high. Given our confidence in the size and immediacy of our existing market opportunity, our outlook for the second half of 2013 includes aggressive investments in our business.

Macro-economic weakness in the EMEA (Europe, Middle East, and Africa) region also played a role in the license-growth slowdown.

Lastly, CFO Michael Berry is leaving the company as of October 1^st in order to become CFO at another high-tech company. Although the departure of a CFO is not exactly good news, getting rid of Berry may be beneficial if he was largely responsible for the financial problems.

I feel confident that SolarWinds can turn things around and return to its pre-2013 growth rate in new license sales of 20%-plus. My optimism is based on the fact that SolarWinds offers high-quality software and services that existing customers love – as evidenced by the high percentage of customer retention and strong 30% growth in maintenance service revenues.

Given the huge global market opportunity of $30 billion in annual network management software sales, SolarWinds’ new investments in Internet search, as well as increased hiring of sales reps, should pay off big in 2014 and beyond. In fact, JP Morgan recently wrote that 2013’s license slowdown will likely prove to be a temporary aberration that resolves itself in 2014 with a resumption of “hyper” growth. Its price target for December 2013 is $54, which is more than 40% above the current stock price.

Although SolarWinds valuation is not cheap on an absolute basis, its valuation is near the lowest level ever relative to what it has traded for in the past since its May 2009 IPO. Of all the stocks in the Roadrunner portfolios, SolarWinds may have the most appreciation potential right now. SolarWinds must agree with this bullish assessment as it announced a $50 million stock buyback program a few days after its Q2 earnings report was released.

U.S. Physical Therapy (Nasdaq: USPH) reported second-quarter results that on the surface appear middling — earnings were flat year-over-year and revenues were up only 5.1%. But these results are actually pretty good considering the Medicare reimbursement reductions  the company faced during the second quarter (Medicare payments are a quarter of total revenues).. As CEO Christopher Reading noted during the conference call:

Earlier this year, you’ll remember the series of federal reimbursement reductions were enacted, first by Congress, through what we refer to as MPPR, a multi-procedure payment reduction. And then as an additional reduction, which came as a result of the sequester. These changes began for us and the rest of the industry in April of this year. So this quarter’s results would be the company’s first quarter financial reporting following these changes.

CFO Lawrance McAfee added that many financial metrics are better than ever:

Our cash flow has been terrific, receivable collections have been excellent. Our average accounts receivables (A/R) outstanding is at an all-time low of 40 days, and despite having added in 21 clinics through acquisition in the first half of the year, we’ve actually been able to reduce our credit line borrowings year-to-date.

The company continues to grow through acquisition of physical therapy clinics and by creating de novo physical therapy practices. Eight new clinics were added in the second quarter, which follows 10 clinic additions in the first quarter. The 18 clinic additions during the first six months of 2013 matched the largest number of clinic additions in any six-month period since at least 2010. Acquisitions appear to be accelerating, which crimps earnings near-term because of integration costs, but sets up very strong earnings growth in future quarters. As of June 30^th, total clinics equaled 449. CEO Reading concluded the conference call with a very optimistic outlook:

The environment today is creating a great opportunity for us to be in a wonderful position to attract the best providers in the market through our continued development and expansion efforts. I believe that there will be a significant consolidation that occurs in our industry, and as we remain active as well as selective with our deals, we have great opportunity with our excellent balance sheet to further grow our company.

Two of three brokerage firms raised their price targets on the stock after the earnings release.

Western Refining (NYSE: WNR) reported second-quarter results that were down from year-earlier levels thanks to reduced refinery profit margin caused by contraction in both the benchmark Gulf Coast 3:2:1 crack spread and the Brent/WTI crude oil spread. Earnings fell 33% but beat analyst estimates, while revenues fell 1.6% and slightly missed estimates.

The good news is that refinery margins appear to be bottoming after cratering at the end of the second quarter in June. The premium of Brent over WTI has widened from $1 in mid-July to $5.60 today. NYMEX 3:2:1 crack spread futures forecast a steady seasonal increase in the spread, culminating in a 55% gain by May 2014. As CEO Jeff Stevens said in the conference call:

Turning to the third quarter, the Gulf Coast 321 remained strong averaging more than $19 per barrel. In addition, the current forward curve reflects similar margins with very strong distillate values throughout the end of the year and into the future.

Will the Brent/WTI crude oil spread ever get back to the $25 level or the 3:2:1 crack spread back to the $35-$40 level that existed in both 2011 and 2012? Maybe not, but Western Refining can grow its earnings through expansion of throughput at its El Paso and Gallup refineries and doesn’t depend solely on super-high profit margins. During the second quarter of 2013, the company completed its Delaware Basin logistics system in southeast New Mexico that includes truck offloading, storage, and gathering pipelines. These assets will increase the company’s capacity to deliver cost-advantaged crude oil to its El Paso refinery. The company completed the capacity expansion of its Gallup, NM refinery in October 2012 and has started preliminary work on expanding the capacity of its five-times-larger El Paso, TX refinery that is scheduled for completion in early 2016.

Financial catalysts include a planned spin-off of pipeline assets into a tax-advantaged MLP before the end of 2013, a stronger balance sheet from debt refinancing, and returning cash to shareholders via share repurchases and increased dividends. On July 17^th, the company increased its quarterly dividend by 50% to $0.18 and has initiated two $200-million share repurchase plans in the past year. The first repurchase plan has been completed and $116 million of the second repurchase plan has already been acquired (page 18 of 10-Q).

Although analysts forecast a drop in earnings in 2014, earnings estimates have started to inch back up in the past week and could easily continue to climb if Brent/WTI and 3:2:1 crack spreads widen more than anticipated. Even if the median 2014 earnings estimate of $3.52 proves accurate, that would still value Western Refining at a very-reasonable 8.5 times earnings based on its current price around $30 — right in line with its historical average P/E multiple.

Ethanol mandates in gasoline are a wild card, but the EPA recently waived the required increase in ethanol blending for 2014 and Congress may consider a permanent modification of the Renewable Fuel Standards (RFS) in the fall session. In any event, Western Refining is less exposed to the ethanol mandate than many refiners because its East Coast wholesale petroleum distributorship and Western-region retail convenience stores generated RFS credits that satisfy 85% of the company’s RFS obligations.