The Fama and French study (1996) has been widely quoted for its research on high and low price to book stocks. Stocks with a low price to book outperformed high price to book stocks globally by 7.6% per year over a 20-year test period. Are these value picking methods still current?
Consider the previous 12 months returns:
- Value-weighted return on all NYSE, AMEX and NASDAQ stocks minus one-month treasury bill (adjusted market gains) = 17.68%
- Small firms versus big firms = 12.58% excess returns
- Value versus growth = 4.31% excess returns
Based on their portfolio tracking methods, we can conclude that small firms are outperforming big ones, and value has the leg-up on growth.
The best and worst performing portfolios over 12 months are small value (33.54% total returns) and big growth (15.87% 12 month returns).
Furthermore, when the Put/Call ratio is low, small cap value tends to outperform as a preliminary finding as the Lee and Song (2003) report shows. We currently have a relatively low Put/Call ratio when compared to a six month average. So we will focus this scan on smaller stocks with good value metrics.
Scanning for Value Stocks Popping Up
- Under 2 billion market cap
- P/B under 2
- Trailing and forward P/E under 20
- Price to cash under 20
- Price to free cash flow under 15
- Price up for the quarter and month
Value Stock List
- (FLL) - Full House Resorts Inc.
- (AEL) - American Equity Investment Life Holding Co.
- (AAWW) - Atlas Air Worldwide Holdings Inc.
- (AYR) - Aircastle LTD
- (NFP) - National Financial Partners Corp.
- (FINL) - Finish Line Inc.
- (BZ) - Boise Inc.
- (PROV) - Provident Financial Holdings Inc.
- (WTSLA) - Wet Seal Inc.
- (FLY) - FLY Leasing Limited
- (PSS) - Collective Brands, Inc.
- (UHAL) - AMERCO
- (MFW) - M&F Worldwide Corp.
- (EDMC) - Education Management Corporation
Some Ratios to Look At
The following data is supplied by FINIZ (Financial Visualizations) and assumed to be correct and current. (Of course, data seems to vary from source to source somewhat.)
- The sub-10 PE stocks are WTSLA (2.6), MFW (5.08), FLY (7.21), PROV (7.45), and BZ (8.5).
- Stocks with greater than 30% average EPS over the past 5 years are BZ (73.21%), FLL (38.84%), MFW (37.4%), and FLY (37.38%).
- The highest average annualized EPS expectations over the next 5 years are FLL (30%), WTSLA (27%), and BZ (20%).
- Price to earnings divided by growth (PEG) less than one are FINL (0.97), AAWW (0.92), EDMC (0.72), BZ (0.42), FLL (0.36), and WTSLA (0.17).
- The lowest price to sales are MFW (0.27), BZ (0.38), PSS (0.43), NFP (0.61), and AEL (0.68).
- Stocks with a price to free cash flow less than 4 are FLY, FLL, BZ, AYR, MFW, and AEL.
- WTSLA has a return on equity of 36.5%.
- The highest profit margin stocks are FLL at 52%, and FLY at 21.4%.
- Stocks with short ratios greater than 10% according to FINZ? BZ, PSS, NFP, FINL, and AEL. This can be a two-edged sword as it shows a hawkish sentiment but can provide a strong upwards push if these short-sellers are forced to buy-in as momentum increases.
- Stocks with high insider ownership are PSS (50%) and NFP (26%). Higher insider ownership is viewed positively since management has a vested interest in raising share prices.
All of the stocks are in good upward trending price patterns, except for MFW which is trying to make a reversal of trend from bear to bull, and AAWW which recently made a large upside breakout past the $45 – 60 trading range on big volume. (Curious about the controversial article on 18 Stocks on the 52 Week Low List Ready to Pop?)
Will these small value stocks continue to outpace mid-large cap growth stocks over the next few months? What is your view?