This column is for investors willing to take more risk and potentially receive more reward.  The stocks mentioned in this column are not recommended to buy or sell.  They're brought to your attention so you can investigate them further to determine if they fit your risk profile.  Most of the stocks will have less than $1 billion of market capitalization, have more volatility than other stocks, and oftentimes no earnings.  And some will have tremendous stories.

September 16, 2011 - Ceradyne, Inc. (CRDN-NASDAQ) engages in the development, manufacture, and marketing of technical ceramic products, ceramic powders, and components for defense, industrial, automotive/diesel, and commercial applications in the United States and internationally.

It also produces functional and frictional coatings primarily for automotive applications; translucent ceramic orthodontic brackets; ceramic-impregnated dispenser cathodes for microwave tubes, lasers and cathode ray tubes; ceramic crucibles for melting silicon in the photovoltaic solar cell manufacturing process; ceramic missile radomes for the defense industry; and fused silica powders for precision investment casting.

In addition, the company makes neutron absorbing materials; nuclear chemistry products for use in pressurized water reactors and boiling water reactors; boron dopant chemicals for semiconductor silicon manufacturing and for ion implanting of silicon wafers; ceramic bearings and bushings for oil drilling and fluid handling pumps; ceramic micro-reactors used to process chemicals; and PetroCeram sand filters for oil and gas recovery.

It serves the U.S. government; prime government contractors; companies engaged in solar energy, oil and natural gas exploration, and nuclear energy; and industrial, automotive, diesel, and commercial manufacturers. The company was founded in 1967 and is based in Costa Mesa, California.

The reason for the extreme moves? The same one as always: earnings.
In 2008, earnings per share were $4.00. In 2009, they were 33 cents. Last year, they bounced back to $1.08. This year, 8 analysts have a consensus estimate of $3.18. Next year, they see $3.10 (with a range of $2.57 to $3.55). Proceed with caution.

Management delivered last quarter with share net almost tripling to 76 cents (up from 26 cents in last year's second period). But analysts expected 87 cents so it was a disappointment. Sales were up 45%. Slower shipments of photovoltaic-related ceramic crucibles at the beginning of the quarter hurt full period results. That's been corrected. Still, margins improved and a strong backlog kept sales and earnings healthy. In the first half of the year, new orders were up 75% compared to the first half of 2010. Foreign sales were 52% of 2010 revenues.

The company is looking to wean itself from the Defense department and defense related products and sales. Still, that's where the orders are coming from. It just won a $36.2 million order for its ceramic body armor fom the U.S. Army. The company hopes to win a 3 year sustainment program for the armor. For 2010, sales to the U.S. Military and defense contractors were 17.5% of the total.

CRDN is growing its markets internationally. It opened a plant in China recently, one dedicated to mostly industrial products. It can service CRDN's customers throughout Southeast Asia. On the other side of the globe, in Germany, the company's ESK Ceramics continues to grow. Look for management to add acquisitions to expand into new markets, both products and geographic. Expect more capital to be allocated to solar and alternative energy segments. To help earnings per share, the company has been buying back its own stock. It has $273.2 million in cash and debt is only 11% of capital so it has the funding capability to work in several different directions simultaneously.

This is still a small company. Total revenues for 2010 were $402.94 million. This year, 7 analysts have a consensus estimate of $585.35 million. In 2012, they expect $591.64 million.

Essential numbers:
- Trailing P/E is 11.29. Forward P/E is 8.75.
- Price to sales ratio: 1.39
- Price to book: .95
- Operating margin (last 12 months): 17.55%
- Profit margin (last 12 months): 12.39%
- Return on equity (last 12 months): 8.97%
- Return on assets (last 12 months): 6.01%
- Total cash per share: $10.98
- Total debt: $87.39 million
- Total debt to equity: 12.26%
- Current ratio: 8.21
- Book value per share: $28.67
- Beta: 1.18
- 52-week change: +12.07%
- Total shares Outstanding: 24.88 million
- Float: 23.35 million
- Held by Insiders: 5.84%
- Held by Institutions: 82.4%
- There is no dividend.

Aggressive investors will want to investigate CRDN further. While its earnings history and stock price have been volatile, it seems to be on the right track. Defense is less important, and new focus on solar and alternative energy programs should keep earnings growing. Just keep in mind that within 7 years, this stock went from $2 to $84 then back to $14. That's a ride only the strongest can survive.

- Company Web site: www.ceradyne.com