Although past performance is no guarantee of future returns, we can still use history as a guide. From Jan. 28, 2000 through Oct. 20, 2006, the small-cap-heavy Russell 2000 index rose 52.73 percent versus the 0.40 percent advance in the large-cap S&P 500 index. Such solid outperformance of the Russell 2000 pointed us in the direction of small companies.
In a recent article, Marc Gerstein wrote about the top-ranked small- and micro-cap stocks that recently appeared on the Reuters Select stock screens. The stocks were ranked according to the historical performance of the screens on which they appeared and according to various data measures. Working from this list of 13 stocks, we found sporting goods and boxing equipment company Everlast Worldwide on the Reuters Select stock screen for Lesser Known Stocks. (Click here for an Excel sheet comparing these 13 companies.)
The Lesser Known Stocks screen is designed to highlight relatively solid companies, on the basis of key fundamental factors, that are relatively ignored by Wall Street. It requires that six or fewer analysts must provide Reuters with earnings estimates. At present, only one analyst provides estimates. But before we could take a look at Everlast, we had to find it from our list of stocks.
Since we want solid companies, we started off by looking for indications that management can effectively use available capital to generate net income. To accomplish this, we filtered for two types of companies. First, we honed in on firms with return on investment [ROI] that is above the industry average over both the five-year and trailing 12-month [TTM] time periods. Second, we allowed companies to underperform the industry mean as long as the firm's ROI relative to the industry has improved in the TTM span from the five-year relative performance. This left us with a list of seven companies.
Then we focused on growth in earnings and filtered for companies where the pace of improvement in earnings per share [EPS] is faster than the industry average over the TTM period and in the most recent quarter [MRQ]. This left us with two companies, including Everlast. Further, this growth helped Everlast satisfy the earning growth requirement of the Lesser Known Stocks screen, which looks for companies with MRQ and TTM EPS growth that is faster than the industry norm.
Given the fast pace of earnings growth, it is not surprising to find that both of these stocks have climbed faster than the average stock-price advances in each of their respective industries over the last year. Shares of Everlast bolted more than 335 percent while the average for the apparel (accessories) industry was only 25 percent. Meanwhile, the stock of Jones Soda Co. (OTCQB:JSDA) jumped about 84 percent against an average gain of just over 13 percent for the non-alcoholic beverages industry. Here, again, Everlast met a requirement of the Lesser Known Stock screen. The screen requires that, over the last year, the return on a company's stock must be no worse than zero. The screen also takes into consideration more-recent performance, requiring that a stock's percentage change over the last four weeks must not be worse than 10 percent. In that time frame, Everlast's stock climbed more than 12 percent, again outpacing the industry average gain of 7 percent.
When stocks rally as quickly as Everlast and Jones Soda did over the last year, there is concern that they may have reached lofty price tags with little room left for further advances. For this reason, we turned our attention to valuation and focused on the company with the lowest price to earnings (P/E) ratio relative to the industry average. This is where Everlast, with a P/E of 15.7 relative to the industry norm of about 25, came out on top.
Note: This is independent investment and analysis from the Reuters.com investment channel, and is not connected with Reuters News. The opinions and views expressed herein are those of the author and are not endorsed by Reuters.com.