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 was generally in line with overall US equities, returning 3.69% (excluding any dividends) versus 3.62% for SPY and 3.37% for VBR, a small cap value ETF. Last month's returns were bolstered by Insight Enterprises (NASDAQ:NSIT) at 27.16% and Molina Healthcare (NYSE:MOH) at 14.94%.

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. Backtesting this screen with a rebalance period of every 4 weeks and a maximum position size of 10% (in instances where less than 10 companies qualify) has produced solid 5, 3, and 1 year returns (see December's list for a backtest). 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 rebalance period can lead to high turnover and transaction costs which can be neutralized by free trades.

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. I continue to watch closely. Last month I highlighted $4.50 as a key support/resistance level with resistance moving to $4.80 this time last month. The stock has once again broken out, just within the past three days. $4.80 now becomes a support level and with no resistance the stock could continue its move up based on current technicals and fundamentals (chart courtesy of Finviz). Click to enlarge:

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

Ticker Name Trend Rank Mkt Cap Proj PE CurFY PEG
MDF Metropolitan Health Networks, Here 99.24 197.79 7.87 0.79
ASYS Amtech Systems, Inc. Here 99.2 232.49 11.21 0.32
DDIC DDi Corp. Here 98.46 224.26 11.19 0.75
SCLN SciClone Pharmaceuticals, Inc Here 98.16 204.12 9.15 0.47
KEM KEMET Corporation Here 98.14 550.94 7.85 0.65
KELYA Kelly Services, Inc. Here 98.02 823.3 19.9 0.9
GLDD Great Lakes Dredge & Dock Cor Here 97.9 499.13 16.14 0.49
ATRO Astronics Corporation Here 97.83 255.18 17.03 0.97
HITK Hi-Tech Pharmacal Co. Here 94.49 287.29 8.67 0.52
CRD.B Crawford & Company Here 91.62 206.73 8.03 0.49
Click to enlarge

Disclosure: No positions