Lessons from the fastest

(FSB Magazine) -- What does it take to catapult your company onto the FSB 100? Innovation and persistence, of course. But this year it also helped if you worked in industrial manufacturing. Although conventional wisdom holds that U.S. factories are trapped in a death spiral thanks to cheap overseas labor, a quarter of our fast-growth all-stars are finding creative ways to thrive in the bent-metal sector, up from 3 percent in 2003.

Another 21 companies are building profitable niches in health care, selling everything from new drugs to remote patient monitors. Tech plays round out the top three categories, with 18 companies providing a smorgasbord of software and semiconductor products.

In a world of stratospheric energy prices, it's natural that 11 of our 100 paragons supply hungry consumers with oil and natural gas. The surprise comes when you discover how entrepreneurs are innovating to break into this capital-intensive sector. Consider Arena Resources (No. 1). Founded in 2000 and operating across four Southwestern states, Arena added three properties in Texas last year, boosting its proven reserves by 4.7 million barrels.

"We don't see oil prices coming down anytime soon," says John McCraw, a small-cap fund manager at Nicholas-Applegate Capital Management in San Diego. McCraw likes Arena for its sophisticated drilling technology.

As in past years, we asked Zacks Investment Research to comb through SEC data to seek fast-growth public companies with annual revenues of less than $200 million and a stock price greater than $1. We ranked our speed demons based on growth in earnings, revenue and stock performance over three years. (Banking, real estate and adult-entertainment firms were excluded.)

Our methodology favors businesses with a track record of solid performance. "You'll get some younger companies if you use one-year numbers," says Eric Ende, a fund manager at First Pacific Advisors in Los Angeles. "But you'll also get more flashes in the pan."

That said, the FSB 100 represents a risky bet by Wall Street standards. The stocks on last year's list under-performed the market, rising 14 percent over the past 12 months, compared with 19 percent for the Russell 2000 stock index. This year, most have market caps of less than $500 million, and all 100 are thinly traded compared with the Fortune 500.

Volatility goes with the territory. After our list closed, for example, American Technical Ceramics (No. 74) signed a buyout offer, vaulting its stock more than 40 percent and making CEO Victor Insetta, a member of our richest list, a centimillionaire.

"The small-cap sector is where fast new companies enter the marketplace, but it's also a repository for a few fallen angels," says noted small-cap expert Satya Pradhuman, CEO of Cirrus Research in New York City. The former category includes market darlings such as Dynamic Materials of Boulder (No. 3), a manufacturer whose explosive process fuses noncorrosive metals to create sturdy welded plates. Dynamic has been on a tear, returning an annualized 166 percent over the past three years. The latter group includes flagging companies such as Cavco Industries (No. 59), a Phoenix maker of prefab homes recently hit by the housing slump.

What can owners of smaller companies learn from the FSB 100? In the following pages you'll find stories that show how four got there. They range from The Knot (No. 15), a wedding-planning Web site that broke almost every rule in the new-media book, to United Therapeutics (No. 22), a biotech firm whose growth was driven by a mother's love for her sick daughter.

The main lesson? Every company on it was once a small business, and the seeds for its success usually were sown when it was the size of the outfit you're running today.