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I am a member of AAII (American Association of Individual Investors) and one of their 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 (as of last month, adjustments to be made this month; see below) 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 > $4
    • Price/book < .80
    • Price/sales < 1.2
    • Top 10 stocks are selected based on highest 52 week returns

This is the eight month of performing the screen. Last month's results were astounding at 9.03% for one month, led by Cagles (CGL.A) which returned an incredible 42.83% for the month. However, at closer glance the shadow stock screen and my variation of the screen have a liquidity drawback. There is no minimum volume requirement, so a stock like Cagles could be difficult to find a liquid market in which to trade. Thus, I have decided to add a minimum requirement of 5k shares daily, which by no means guarantees a liquid market but will eliminate some microcap stocks which have little to no trading, often times trading 0 shares in a day (such as Continental Materials (CUO), from last month's list).

Adding this volume requirement to last month's list would have resulted in a slightly different list of 10 stocks, returning an average of 8.65%, led by Escalade (ESCA), a company specializing in the manufacturing and sale of sporting goods. ESCA also announced a $.10/share dividend on November 9th, which gives it a current yield of 2%. The company had paid an annual dividend from 2004-2008 before skipping the 2009 dividend. The stock remains on this month's list.

I have also made a new adjustment to the share price requirement. The AAII Shadow Stock screen required a share price greater than $4. I am removing this requirement and replacing it with a share price requirement of greater than $1.

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 5 year return chart below (click to enlarge) that the screen struggled most in 2008 along with the rest of the market (returns on the charts assume .5% slippage but do not account for commissions or taxes) and the 1 year results have been close to 50%. I said previously that "this is not a strategy I am investing in. However, if an investor was looking to add some risk to his or her portfolio, this one could certainly add some 'juice'." One additional option which I have mentioned on other screens 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.






The current top 10 stocks are also below. 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.

Ticker Name Free Trend Analysis Rank MktCap Industry
STRC SRI/Surgical Express, Inc. Here 98.13 28.2 Personal Services
ESCA Escalade, Inc. Here 94.97 65.57 Recreational Products
IMOS ChipMOS Technologies (Bermuda Here 94.65 160.79 Semiconductors
AHC A. H. Belo Corporation Here 91.25 176.17 Printing & Publishing
FFHL Fuwei Films (Holdings) Co., L Here 85.64 26.61 Fabricated Plastic & Rubber
GFN General Finance Corporation Here 85.36 40.72 Real Estate Operations
TIII Tii Network Technologies, Inc Here 82.55 25.78 Electronic Instr. & Controls
HAST Hastings Entertainment, Inc. Here 82.1 60.09 Retail (Specialty)
MDH MHI Hospitality Corporation Here 80.07 22.52 Real Estate Operations
SVLF Silverleaf Resorts, Inc. Here 73.6 40.79 Hotels & Motels

Disclosure: No positions in stocks mentioned

Source: 10 Micro-Cap Value Stocks