United-Guardian Poised To Set New Highs

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One of my favorite micro-cap growth stocks is United-Guardian, Inc (UG), a research and product development firm from Long Island specializing in personal care and pharmaceutical products. With extremely solid fundamentals, like a P/E of 18, a net profit margin of 16-30%, a 4% dividend, and no debt, UG is an attractive long play on a well-managed company.

In August, the company said sales for the first six months of 2010 exceeded $7.3 million, the highest six-month sales period in United’s history and a 6% increase over the first six months of 2009. For the quarter ended in June, earnings were up 67% on sales growth of 25%. That marked a rebound after declines in the March quarter.

Unlike many other stocks with attractive fundamentals, United-Guardian has not seen triple-digit returns in 2010, instead, only returning about 20% to investors. This is likely one of the key reasons behind a May stock repurchase — executives felt the company was severely undervalued.

Being a micro-cap, it only trades a small number of shares – about 2,800 per day. That can make it a bit more risky than something with more liquidity, because if one or two big investors bail out, an individual investor can get slaughtered. Only eight U.S.-based mutual funds or hedge funds own shares. That’s a small number, but not surprising, given how few shares are available.

The stock made an 11% price jump in August, and has held above its key 10-week moving average since then.

Consistently trending upward since May, it’s been hard to select a buy point for the stock. A recent consolidation has brought the stock closer to my magical $13.50 number, which it closed at yesterday. For this reason, I can strongly recommend a position in a stock with favorable technical and the fundamental indicators.