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Arie Goren, Portfolio123 (506 clicks)
Long only, value, research analyst, dividend investing
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I have searched for highly profitable small caps stocks that pay very rich dividends and that are in a short-term uptrend, in a mid-term uptrend and in a long-term uptrend. Those stocks would also have to show a very low forward P/E ratio and strong earnings growth prospects.

I have elaborated a screening method, which shows stock candidates following these lines. Nonetheless, the screening method should only serve as a basis for further research. All the data for this article were taken from Yahoo Finance and finviz.com. The screen's formula requires all stocks to comply with all following demands:

  1. The forward dividend yield is greater than 4.30%.
  2. Forward P/E is less than 12.
  3. Average annual earnings growth estimates for the next five years is greater than 10%.
  4. The stock price is above the 20-day simple moving average (short-term uptrend).
  5. The stock price is above the 50-day simple moving average (mid-term uptrend).
  6. The stock price is above the 200-day simple moving average (long-term uptrend).

After running this screen on September 07, 2013, I discovered the following three stocks:

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Compass Diversified Holdings (CODI)

Compass Diversified Holdings is a public investment firm specializing in acquiring controlling stakes in small to middle market companies.

Compass Diversified Holdings has a very low forward P/E of 9.55. The price-to-sales ratio is very low at 0.90, and the average annual earnings growth estimates for the next five years is quite high at 11%. The forward annual dividend yield is very high at 8.14%. The annual rate of dividend growth over the past three years was at 1.92% and over the past five years was at 3.29%.

The CODI stock price is 0.98% above its 20-day simple moving average, 0.37% above its 50-day simple moving average and 11.63% above its 200-day simple moving average. That indicates a short-term, mid-term and long-term uptrend.

Compass Diversified Holdings has recorded strong revenue and EPS growth, and mild dividend growth during the last year, the last three years and the last five years, as shown in the table below.

Source: Portfolio123

On August 07, Compass reported its second-quarter financial results, which beat EPS expectations by $0.04.

Second Quarter 2013 Highlights

  • Generated Cash Flow Available for Distribution and Reinvestment of $23.5 million for the second quarter of 2013;
  • Reported net income of $2.0 million for the second quarter of 2013;
  • Paid a second quarter 2013 cash distribution of $0.36 per share in July 2013, bringing cumulative distributions paid to $9.5952 per share since CODI's IPO in May of 2006;
  • Exercised option to expand term loan facility and amended the pricing terms of both the term loan facility and revolving credit facility.

Compass Diversified Holdings has recorded strong revenue and EPS growth, it has strong earnings growth prospects, and it has outperformed the market since 2006. In my opinion, CODI stock can move higher. Furthermore, the very rich dividend represents a gratifying income.

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Source: company presentation

Risks to the expected capital gain and to the dividend payment include; a downturn in the U.S. economy, and the company's debt of $297 million.

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Chart: finviz.com

GFI Group Inc. (GFIG)

GFI Group Inc. provides wholesale brokerage, clearing, and electronic execution and trading support products and services for financial markets in the United States, the United Kingdom, and internationally.

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Source: company presentation

GFI Group Inc. has a very low forward P/E of 11.80. The price-to-cash ratio is very low at 1.94, and the average annual earnings growth estimates for the next five years is very high at 20%. The forward annual dividend yield is very high at 4.93%.

The GFIG stock price is 1.41% above its 20-day simple moving average, 0.58% above its 50-day simple moving average and 13.56% above its 200-day simple moving average. That indicates a short-term, mid-term and long-term uptrend.

On July 25, GFI Group Inc. reported its second-quarter results. EPS came in at $0.06, in-line with expectations.

Second Quarter 2013 Highlights

  • Non-GAAP net revenues increased 0.8% to $197.3 million in the second quarter of 2013, from $195.8 million in the second quarter of 2012.
  • Brokerage revenues for the second quarter of 2013 declined 0.8% to $174.0 million, from $175.4 million in the second quarter of 2012. Revenues from trading software, analytics and market data products for the second quarter of 2013 were $21.8 million, up 6.5% from $20.5 million in the second quarter of 2012.
  • Compensation and employee benefits expense in the second quarter of 2013 was 68.2% of net revenues on a non-GAAP basis, as compared to 68.8% in the second quarter of 2012.
  • Non-compensation expenses were 27.2% on a non-GAAP basis in the second quarter of 2013 compared with 28.9% in the second quarter of 2012.
  • Net income for the second quarter of 2013 was $7.1 million, or $0.06 per diluted share, on a non-GAAP basis compared with $2.7 million or $0.02 per diluted share, in the second quarter of 2012.
  • Cash earnings for the three month period ended June 30, 2013 were $27.6 million, or $0.22 per diluted share, compared with $22.8 million, or $0.19 per diluted share, for the same period in 2012.

GFI Group Inc. has cheap valuation metrics and strong earnings growth prospects. In my opinion, GFIG stock still has room to go up. Furthermore, the rich dividend represents a nice income.

Risks to the expected capital gain and to the dividend payment include; a downturn in the U.S. economy, and the company's debt of $250 million.

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Chart: finviz.com

Valassis Communications Inc. (VCI)

Valassis Communications, Inc., together with its subsidiaries, provides media solutions primarily in the United States and Europe.

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Source: company presentation

Valassis Communications has a very low trailing P/E of 9.57 and a very low forward P/E of 8.24. The price-to-sales ratio is very low at 0.51, and the price to free cash flow for the trailing 12 months is also very low at 9.22. The PEG ratio is extremely low at 0.36, and the average annual earnings growth estimates for the next five years is very high at 26.70%. The forward annual dividend yield is high at 4.38%, and the payout ratio is only 31%.

The VCI stock price is 0.17% above its 20-day simple moving average, 2.08% above its 50-day simple moving average and 5.77% above its 200-day simple moving average. That indicates a short-term, mid-term and long-term uptrend.

On July 25, Valassis Communications reported its second-quarter financial results, which missed EPS expectations by $0.07 and missed on revenues, the guides for the year EPS was in-line.

In the report, the company explained:

Revenues were $495.9 million, a decrease of 8.2% from $540.2 million in the prior year quarter. This decrease was due primarily to an anticipated decline in revenues in the Neighborhood Targeted segment resulting from the change in certain client contracts to a fee-based media placement model, as well as the discontinuance of the sampling and solo direct mail products. Without the effect of these changes, second-quarter 2013 adjusted revenues increased 1.2%.

Second-quarter 2013 diluted earnings per share was $0.68, which included the negative impact of the aforementioned restructuring costs of $0.02, an increase of 33.3% from $0.51 in the prior year quarter, which included the negative impact of the aforementioned restructuring costs, asset impairments and other non-recurring charges of $0.25. Excluding these charges, second-quarter 2013 adjusted diluted EPS was $0.70 and second-quarter 2012 adjusted diluted EPS was $0.76. Second-quarter 2013 adjusted EBITDA was $66.2 million, a decrease of 13.8% from $76.8 million in the prior year quarter.

Valassis Communications' Outlook

Based on our plan and current outlook, we reiterate full-year 2013 guidance as follows:

  • diluted earnings per share of between $3.05 and $3.20,
  • adjusted EBITDA of between $290.0 million and $300.0 million, and
  • capital expenditures of approximately $25 million.

2013 Planned Uses of Cash:

  • Stock repurchase program: We assume the use of approximately 35-40% of free cash flow for stock repurchases during 2013. Our stock repurchase program does not obligate us to acquire any particular amount of shares of common stock, and may be modified or suspended at any time at our discretion.
  • Quarterly dividend: In December 2012, the Board approved a cash dividend policy pursuant to which Valassis intends to pay a quarterly cash dividend to holders of its common stock. The dividend for the quarter ended June 30, 2013 was $0.31 per share of common stock.

Valassis Communications has recorded strong EPS growth during the last year, the last three years and the last five years; the annual rate of EPS growth over the past year was at 21.22%, over the past three years was at 27.82%, and over the past five years was at 21.11%.

Although VCI missed second-quarter EPS and revenues expectations, its valuation metrics are compelling, the company growth prospects are strong, and the company's guidance was positive. In my opinion, an investor in VCI stock can expect a capital gain along the very rich dividend.

Risks to the expected capital gain and to the high dividend payment include; a downturn in the U.S. and in the European economies, and the company's massive debt of $565 million.

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Chart: finviz.com

Source: 3 High-Yielding Small Caps With A Low Forward P/E Ratio In An Uptrend