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10 Small-Cap Value Stocks With Big Potential - 20494 views
NEW YORK (Scott's Investments) -- I am a member of the American Association of Individual Investors, one of whose more popular screens is the Shadow Stock Screen. I conduct a close replication of this screen on a monthly basis. This is a very simple screen that seeks out small/microcap value stocks. The screen criteria I use within stockscreen123 are:
• No over-the-counter stocks
• No financial stocks
• Market cap > $20 million and < $200 million
• Previous EBITDA quarter and trailing twelve months are positive
• Share price > $1
• Price/book < 0.80
• Price/sales < 1.2
• Top 10 stocks are selected based on highest 52-week returns
• Minimum average daily volume > 5,000 shares
This is the ninth month of performing the screen. Last month's results averaged 12.29% for the 10 stocks, led by Silverleaf Resorts' (SVLF) return of over 38% in four weeks and Fuwei Films' (FFHL) 34% four-week return (returns are hypothetical and exclude commissions and taxes). In the previous month, this strategy returned 8.77%, led by FFHL's incredible 72.76% for the month. FFHL is headquartered in China and develops and manufactures plastic film. A strong earnings report in mid-November has helped spur the strong returns.
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The strategy tends to be high beta; it performs very well in bullish markets and may underperform in bear markets. You can see on the five-year return chart below that the screen struggled most in 2008 along with the rest of the market. (Returns on the charts assume 0.5% slippage but do not account for commissions or taxes; however, free trades are always one option to avoid commissions.) As I've said before, that this is not a strategy I am investing in but it can lead to some under the radar investment ideas with additional due diligence.
One option is to abandon this type of strategy or move to cash when an underlying index such as the Russell 2000 is trading below a long term moving average such as the 200 day moving average. Currently the Russell 2000 is above its 200-day moving average. Another consideration is to hedge the strategy by shorting a small cap ETF or purchasing an inverse small cap ETF. Given that the market rally is beginning to look a little tired as of last week, now may be a time to consider a hedge if also considering a high beta strategy such as this one.
The current top 10 stocks are also below. FFHL tops this month's list for the second consecutive month. I update the screen once per month on my site and track the results for free on the right hand side of the site. Full results for all months can be viewed on the right side of Scott's Investments under "Micro Value Screen". The tool used for the screen is stockscreen123.
At the time of publication, author had no positions in stocks mentioned.
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.
Please note that small-cap stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.