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10 Small-Cap Stocks Trending the Right Way - 20097 views
The following commentary comes from an independent investor or market observer as part of TheStreet’s guest contributor program, which is separate from the company’s news coverage. The opinions expressed are those of the author and do not represent the views of TheStreet or its management.
NEW YORK (Scott's Investments) -- Below is a list of 10 small-cap stocks with a positive earnings trend. I use stockscreen123 as a tool and screener to find small-cap value stocks with recent earnings surprises.
I define value as a stock with a projected current year P/E of under 20 and a price-to-earnings-growth ratio under 1. “Small-cap” is defined as having a market capitalization under $1 billion. The earnings surprises are defined as stocks which have beaten estimates the past two quarters and have an average earnings surprise of 20% or more for the past four quarters. I also require stocks to be trading above their 200-day simple moving average.
Last month's portfolio of 10 stocks performed very well, returning 8.77% (excluding any dividends) with only one stock having a return below zero. As a comparison, during the same time period, SPDR S&P 500 (SPY) returned 3.04% and Vanguard Small Cap Value ETF (VBR) returned 4.74%.
Why do I track this screen? I find PEG an effective ratio for identifying growth stocks at a reasonable value. In addition, a recent history of earnings increases could, in theory, help identify companies with the ability to continue to surprise. Back-testing this screen with a rebalance period of every four weeks and a maximum position size of 10% (in instances where less than 10 companies qualify) has produced solid five-, three- and one-year returns. (See December's list for a back-test.) A quick visual inspection shows this screen has done well as a high beta play -- outperforming in positive market environments and struggling in down markets. Also, a four-week rebalance period can lead to high turnover and transaction costs.
One stock worth noting on this month's list is Hi-Tech Pharmacal (HITK), which is also on my top momentum stock list for this week. HITK develops, manufactures, markets, and sells generic, prescription, over-the-counter and nutritional products in liquid and semisolid dosage forms in the U.S. It traded at a 52-week high on Friday, April 15, on strong volume. The recent surge has been in part due to recent tentative and final approvals by the FDA on a variety of HITK products.
I exclude OTC stocks and I further narrow the list based on additional stockscreen123 fundamental factors ("Quality-Value-Growth") to 10 stocks or less. The list, as always, is not a specific portfolio but a recommendation for further research. Since this is a purely mechanical screen, I play no discretion in the results (other than establishing the original screen criteria).
Scott's Investments focuses on consolidating and tracking free online investment resources for the public with an emphasis on ETFs, portfolio/trading strategies and macroeconomics. Follow Scott's Investments on Twitter.