Every day, I spend between 10-12 hours scouring the market for lucrative stock opportunities. I run growth screens, fundamental screens and insider buying screens — all to find the best stock ideas for you.

Occasionally, I find some interesting companies that are just a bit too risky to recommend as “buys” in my newsletter, Penny Stock Fortunes . But they are also too good not to tell someone about.

Today, I will share one of those ideas with you. I found it by running my “fundamentally sound and growing” stock screen. Specifically, I screened for companies with growing top and bottom lines (quarter over quarter and YTD over YTD) and low price-to-earnings, price-to-book and price-to-sales ratios. I also insisted that the stocks be liquid — with an average daily trading volume of at least 100,000 shares a day. And to keep it in the penny stock sphere, the stocks could trade for no more than $10.

Believe it or not, I found only five companies on the market that fit the bill. They were:

1) LJ International, Inc. (JADE:NASDAQ)

2) CalAmp Corp. (CAMP:NASDAQ)

3) New York Mortgage Trust, Inc. (NTR:NYSE)

4) Hartmarx Corp. (HMX:NYSE)

And the fifth was ICO, Inc. (ICOC:NASDAQ) — a tiny $95 million company that manufactures resins and concentrates used to make all kinds of things, like toys, water tanks, paint, garbage bags and plastic films.

ICO buys raw materials like polyethylene, polyester, polypropylene, nylon, fluorocarbons, waxes and a whole lot of other unpronounceable stuff. It mixes, crushes and blends those materials to create compounds that are then sold to chemical and plastics companies to make things like paints, trashcans, auto parts, plastic films, fertilizer tanks and even household furniture.

The best way to think of ICO is a value-added company to the chemical and plastics producers of the world. It allows these guys to improve their end products by making them flame retardant, colorful, tear resistant, ultraviolet safe or adhesive in nature — all by creating and mixing the right resins together. And with manufacturing plants and facilities all over the world (The United States, Europe, Asia and South America), ICO is a market leader in its space.

One of the things I really like about ICO is that it has carved out a nice little niche for itself. There aren’t a million companies that do the same thing ICO does. So it seems the company has a relative moat to protect its business. Another comforting thing (especially considering ICO’s size) is that none of its customers makes up more than 10% of its total sales (so it isn’t dependent on just one or two major contracts). And finally, in the last 12 months, business has boomed.

ICO announced its first-quarter results for FY 06 on Feb. 8. Revenues rose 5%, to $75.1 million, versus $71.4 million a year ago. Earnings totaled $3.1 million — up from $1.2 million last year. Gross margins increased by 17%. And its operating income rose by nearly 100%.

But was this a fluke quarter, I wondered? To find out, I looked at the company’s results for the last couple years. Check ‘em out…

Everything is moving in the right direction. Sales and earnings are rising. Profit margins are widening. Its cash position is increasing. And its long-term debt is falling. Nothing wrong with those trends. And when you combine its growth numbers with its “value” ratios, you can see why this made my list of fundamentally sound and growing small-cap companies.

Currently, ICOC stock trades for just 17 times earning, 0.32 times sales and 1.19 times book value. The industry average is 9.7, 0.85 and 2.64, respectively. So ICOC certainly seems like it has some room to grow.

But what really intrigued me about this company was the insider buying over the last year. It seems the guys who run the business have a pretty bullish outlook on their own future. Take a look at their transactions for the past 12 months:

Anyone who would have bought this stock when the insiders were piling in between $2 and $2.32 would be up 60% right now. But what is especially interesting is an ICO director just bought a block of 16,000 shares in December at $3.23. So maybe the run isn’t over yet. As you know, it’s usually a bullish sign when a company’s insiders buy a stock up — which is what has happened over the last 12 months. And at $3.68 a share right now, it is only trading 14% higher than where Mr. Frischkorn bought in three months ago.

So the question remains, why am I NOT recommending this tiny resin manufacturer with all my might?

There are a couple things that scare me a bit. The biggest thing is that ICO deals with raw materials. In other words, it is a commodities business. When its raw materials go up or down in price a lot, the company can lose money in a hurry — a la 2003, when it lost $50 million! Obviously, you wouldn’t want to buy in now only to see the company tank. And unfortunately, the resin market isn’t exactly easy to predict — like, say, the oil or gas market. So I can’t even make a reasonable guesstimate of what will happen in 2006.

The second thing that bothers me about ICO is its thin profit margins. This isn’t exactly the most profitable business in the world. ICO raked in $75.1 million last quarter and only netted $3.1 million. That’s a net profit margin of just 4.1% — which tells me this is really a business of managing inventories and raw materials so you don’t get caught with expensive goods you have to sell for prices below what you paid.

Of course, the flip side of this argument is that ICO had a fabulous year managing its inventories and the price of its resins (raw materials) remains strong. If that’s the case, this stock could take off — especially come earnings season.

At the end of the day, I will be watching ICO closely to see if the insiders continue to buy. If they do, I may just recommend this stock yet. After all, the guys running the company know the resins market better than anyone. So if they start piling in again, I will too. But for now, put ICO on your watch list.

Best regards,

James Boric
February 23, 2006

P.S. I made a reference earlier in my essay that predicting the oil and gas markets is easy compared with predicting the resins market. Truth is, predicting any commodity’s price is difficult.

James Boric

James Boric began his finance career by successfully picking winning stocks. With time and experience, James realized his goal- to figure out how an average, everyday investor with little capital could become wealthy. The trick, he discovered, was to look to the quickest moving, most exciting and lucrative group of stocks in Wall Street history — small-caps.

Special Report: HOW YOU COULD TURN $200 INTO $1.2 MILLION!

More on this topic (What's this?)

Coffee: Grounds For Concern? (Hard Assets Investor, 1/21/09)

Read more on International Coal Group at Wikinvest

View articles by James Boric