10 Small Cap Stocks With Positive Earnings Surprises

by: Scott's Investments

Below is a list of 10 small cap stocks with recent earnings surprises to consider in the short (or long) term. For the purpose of this monthly list, I define value as a stock with a projected current year PE of under 20 and a Price to Earnings growth ratio under 1. Small cap is defined as having a market capitalization under $1 billion. The earnings surprises are defined as stocks which have beaten estimates the past 2 quarters and have an average earnings surprise of 20% or more for the past 4 quarters. I also require stocks to be trading above their 200 day simple moving average. I use stockscreen123 as the tool and screener.

Last month's portfolio can be seen here. Last month, the list outperformed at 7.44% (excluding any dividends) versus 4.03% for SPY and 6.16% for VBR, a small cap value ETF. Last months returned were bolstered Intevac (NASDAQ:IVAC) at 16.96%, Kadant (NYSE:KAI) at 18.2% and Power-One (NASDAQ:PWER) at 20.54%. Only two of the 10 stocks had negative returns for the month, Sorl Auto Parts (NASDAQ:SORL) -8.27% and Stein Mart (NASDAQ:SMRT) -11.48%.

I exclude OTC stocks and I further narrow the list based on additional stockscreen123 fundamental factors to 10 stocks or less. The list, as always, is not a specific portfolio but a recommendation for further research. Since this is a purely mechanical screen, I play no discretion in the results (other than establishing the original screen criteria).

Of note, MDF has been a qualifying stock on this list since May. Last month, I observed that "it has been relatively flat since May but I would watch the $4.50 price level for any potential price breakout." As you can see below, it is struggling to break strongly above the $4.50 level, remaining mostly flat in the $4.50-$4.65 range the past week:

Click charts below to enlarge

Why do I track this screen? I find PEG an effective ratio for identifying growth stocks at a reasonable value. In addition, a recent history of earnings increases could, in theory, help identify companies with the ability to continue to surprise. Back testing this screen with a re-balance period of every 4 weeks and a maximum position size of 10% (in instances where less than 10 companies qualify) has produced the 5, 3, and 1 year returns below. A quick visual inspection shows this screen has done well as a high beta play - outperforming in positive market environments and struggling in down markets. Also, a 4 week re-balance period can lead to high turnover and transaction costs.

This month's list consists of the following 10 stocks:

Ticker Name Market Cap. Industry
RELL Richardson Electronics, Ltd. 198.22 Electronic Instr. & Controls
MDF Metropolitan Health Networks, 186.06 Healthcare Facilities
ASYS Amtech Systems, Inc. 213.31 Semiconductors
SCLN SciClone Pharmaceuticals, Inc 195.04 Biotechnology & Drugs
DDIC DDi Corp. 228.05 Electronic Instr. & Controls
LABL Multi-Color Corporation 270.72 Printing Services
IRBT iRobot Corporation 587.78 Appliance & Tool
HITK Hi-Tech Pharmacal Co. 313.11 Biotechnology & Drugs
OTC:CVVT China Valves Technology, Inc. 357.17 Misc. Fabricated Products
RUSHA Rush Enterprises, Inc. 735.14

Auto & Truck Manufacturers

Disclosure: No positions