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Summary

  • Reports of the death of growth stocks have been highly exaggerated.
  • Companies with high return on equity (ROE) outperform in terms of efficiently deploying equity to generate profits.
  • Insider buying is also an indication that management thinks company shares have room to grow.

Monday was good to stocks this week, as manufacturing and home-building data from the US coupled with a wave of mergers and acquisitions to drive markets up.

This all happened despite an increasingly troubling situation in Iraq and persistent concerns about Ukraine, where Russia has stopped delivering natural gas.

The biggest merger was between Medtronic (NYSE:MDT) and Covidien plc (NYSE:COV). With a market cap of more than $60 billion, Medtronic has become the largest American corporation yet to relocate overseas, in a move that echoes earlier attempts by Pfizer (NYSE:PFE) to move abroad this year.

The positive economic news inspired us to look for some growth stocks. To do that we naturally focused our attention on small cap companies that have room to, well, grow.

We started with a universe of 200 small cap companies that have a return on equity (ROE) of 25% or more. This means that the company outperforms in terms of efficiently deploying equity to generate profits.

We then narrowed that screen further by looking for signs of insider buying, which is particularly useful when analyzing smaller companies. When a regional head of Coca Cola (NYSE:KO) sells some of their stock, it's not a huge deal. Most likely, they probably just needed some extra cash.

But when the higher ups at smaller companies are buying shares, it might mean something is in the works. When we screened the 200 stocks in our initial universe, only 3 had spikes in insider buying. Do you think that signals growth ahead? Use the list below to begin your analysis and let us know what you think in the comments.

1. Cumulus Media Inc. (NASDAQ:CMLS) (Kapitall snapshot): Engages in the acquisition, operation, and development of commercial radio stations in the United States. Market cap at $1.36B, most recent closing price at $6.25.

Over the last six months, insiders were net buyers of 1,472,842 shares, which represents about 1.15% of the company's 127.86M share float.

ROE: 38.7% vs. Industry Average of 17%

2. Quantum Corporation (NYSE:QTM) (Kapitall snapshot): Operates as a storage company that provides backup, recovery, and archive solutions to small businesses to multinational enterprises in the United States and internationally. Market cap at $303.3M, most recent closing price at $1.21.

Over the last six months, insiders were net buyers of 2,675,000 shares, which represents about 1.23% of the company's 217.79M share float.

ROE: 32.10% vs Industry Average of 21.53%

3. Valhi, Inc. (NYSE:VHI) (Kapitall snapshot): Operates in the chemicals, component products, and waste management businesses. Market cap at $1.76B, most recent closing price at $5.20.

Over the last six months, insiders were net buyers of 453,304 shares, which represents about 3.93% of the company's 11.53M share float.

ROE: 75.9% vs. Industry Average of 24.33%

Source: 3 Small Caps With Insider Buying And Exceptional Return On Equity