17 Largely Ignored Value Stocks With Hidden Growth

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 |  Includes: AGN, AMCF, BSPM, CBEH, CBP, CELM, CEPH, CPHI, CRTX, FUQI, KTCC, LPIH, SKBI, SYX, TPI, WDC, WWIN
by: Kurtis Hemmerling

Before we outline the value stocks with hidden growth that are mostly ignored by the investment community, I need to explain how we get there. It starts with a famous duo that rocked the investment community with a paper showing how value stocks outperformed growth.

Going Beyond Fama and French Portfolios
Fama and French (Value Versus Growth: The International Evidence, 1997) have created quite a following with their 3 model approach to building portfolios that outperform the market by an average of 7.6% annually. They build massive portfolios of high book to price stocks and then compare these to the results of stocks with low book to price stocks (HML – high minus low). Another portfolio compares small market cap stocks with large market cap stocks (SML – small minus large).

However, there seems to be a lack of individual data relating to individual stocks. What fundamental factors influence small value stocks to outperform? As investors who want to cherry pick individual stocks, we want to know what makes one value or small stock better than the next.

  • This topic is partially dealt with in a new paper by Sharpovalova, Subbotin, and Chauveau (2011) with the following name: Returns Premia on Company Fundamentals.

What did they discover? Well, in part they found a correlation between value stocks and ones that have internal growth, as well as an increase in sales (one year trailing data on sales was significantly only). These three factors are linked - especially during bull markets. When comparing various bear markets, there seemed to be little correlation between any one fundamental factor and reduced risk. During one bear market, small stocks might weather the storm best, in another market, it could be a totally different aspect. So in bad markets you should absolutely hedge through Puts, sectors balancing, globalization techniques, or some other strategy.

Scanning for Value and Growth

Our scan below will take in the following criterion:

  • Internal growth that beats the industry by a factor of 1.5 or more over the past three years and trailing 12 months (ROE)
  • Net margin over the past 12 months beating the industry margin
  • Lower liability to asset ratio than industry average
  • Sales growth exceeding industry sales growth by a factor of at least 1.3
  • Price to book less than .75 of industry average

Potential Fundamental Picks for Growing Markets

Based on this criteria, a list of 17 stocks appeared. Now before I list the stocks, let me warn you that 11 of them are from China. Add to that, the China stocks are also all micro cap with the exception of one nano cap. So far, it appears that our scan, although not targeting the Fama and French small stocks, picked them up all the same. Make sure you understand the current risk with China stocks before indiscriminately buying. Also note that 8 of the 17 stocks are in the Healthcare sector (OTCPK:SKBI, TPI, WPI, BSPM, CBP, CEPH, CPHI, and CRTX).

Ticker

Company

Country

Market Cap (mil)

CEPH

Cephalon Inc.

USA

4358.26

CRTX

Cornerstone Therapeutics Inc.

USA

148.97

KTCC

Key Tronic Corp.

USA

46.26

SYX

Systemax Inc.

USA

473.17

WDC

Western Digital Corp.

USA

8224.29

WPI

Watson Pharmaceuticals Inc.

USA

7220.13

WWIN

Winner Medical Group Inc.

China

121.62

TPI

Tianyin Pharmaceutical Co., Inc.

China

79.1

LPH

Longwei Petroleum Investment Holding Limited

China

220.4

OTCPK:SKBI

Skystar Bio Pharmaceutical Company

China

53.49

OTCPK:FUQI

Fuqi International, Inc.

China

120.74

CPHI

China Pharma Holdings, Inc.

China

114.98

AMCF

Andatee China Marine Fuel Services Corporation

China

43.92

BSPM

Biostar Pharmaceuticals, Inc.

China

63.44

OTCPK:CBEH

China Integrated Energy, Inc.

China

209.07

CBP

Renhuang Pharmaceuticals, Inc.

China

74.48

OTCPK:CELM

China Electric Motor, Inc.

China

82.28

Click to enlarge

Another interesting aspect to look at these stock is the incredibly low P/E ratios on average, the amount of high insider ownership (which is expected more in smaller companies), and high short ratios, or days to cover short positions and current volume levels.

Ticker

P/E

Insider Ownership

Short Ratio

CEPH

10.94

1.36%

9.89

CRTX

18.16

56.07%

7.79

KTCC

4.52

0.94%

0.57

SYX

10

0.04%

10.81

WDC

7.65

0.78%

1.87

WPI

38.51

0.17%

2.49

WWIN

9.69

76.71%

4.81

TPI

5.6

32.43%

0.04

LPH

4.23

66.91%

2.15

OTCPK:SKBI

4.22

3.46%

1.44

OTCPK:FUQI

2.09

42.52%

4.05

CPHI

5.64

0.02%

4.55

AMCF

4.57

57.44%

0.16

BSPM

6.38

43.03%

0.01

OTCPK:CBEH

5.19

70.11%

8.29

CBP

4.44

0.06%

0.21

OTCPK:CELM

5.43

50.59%

1.2

Click to enlarge

CEPH Stock Market Prices Compliments of Stockcharts.com
Do Earnings and Future Forecasts Matter?

Within the framework of this paper, they did not find a strong correlation between earnings and future forecasts. But remember, they were not digging deep into various methods of forecasts such as raised earnings outlook, analyst upgrades, or low dispersion and error earnings predictions.

To keep in line with the spirit of the aforementioned paper, we will not include past earnings and future forecasts as part of our predictive measures.

Price Performance and Momentum

The momentum principle is that winning stocks over the past 3 – 12 months will continue to perform well. Stocks that popped or have positive momentum over the past month often have a price slide thereafter, and stocks that drop on heavy momentum over a month could have a short-term price pop. Long-term, we go with the trend, but with very short time-frames the contrarian strategy wins.

How do our stocks stack up to this? Optimally, we would want a stock performing very well over the year, but with one month weakness if the momentum strategy is to be followed.

Ticker

Performance (Week)

Performance (Month)

Performance (3 Months)

Performance (6 Months)

Performance (Year)

CEPH

0.52%

-4.73%

-12.36%

-5.00%

-19.54%

CRTX

10.67%

-1.86%

-3.17%

-13.54%

3.75%

KTCC

-4.08%

-7.07%

-14.86%

-16.14%

-25.75%

SYX

-4.66%

-7.86%

-0.62%

7.41%

-37.23%

WDC

19.33%

-2.31%

1.20%

35.65%

-6.75%

WPI

3.11%

2.87%

15.31%

28.17%

41.40%

WWIN

-1.56%

-11.73%

-8.36%

-2.14%

-26.10%

TPI

-3.11%

8.11%

-1.75%

-2.78%

-26.12%

LPH

-9.47%

-10.57%

11.11%

OTCPK:SKBI

-2.99%

-2.73%

-8.46%

5.81%

-26.04%

OTCPK:FUQI

3.07%

-15.15%

-31.29%

-31.18%

-78.59%

CPHI

-8.30%

-12.83%

3.92%

-3.64%

-28.57%

AMCF

-6.54%

0.66%

-20.38%

17.18%

-39.79%

BSPM

-2.07%

-5.22%

-17.48%

-6.35%

-37.07%

OTCPK:CBEH

4.22%

1.48%

-18.04%

-14.88%

-27.63%

CBP

-0.99%

14.94%

-3.38%

27.39%

-7.83%

OTCPK:CELM

-2.34%

-9.42%

-22.20%

-20.21%

-38.02%

Click to enlarge

Unfortunately, most of these stocks are serious under-performers for the year. This doesn’t bode well for those following the momentum strategy of buying stocks with long-term strength, although there are still some heavy price droppers when looking at monthly performance.

But on the bright-side, although the paper found momentum factors to be significant overall, it did not have as much importance on individual stocks where internal growth, increasing sales, and value were scanned for.

Risks and Warnings

If you believe in scanning for criteria that has a lack of investor focused (as opposed to earnings per share), and you think the market is somewhat inefficient and not properly factoring in sales, internal growth, and value (or particularly, growth in value stocks), then you might want to pick up a few of these stocks as a higher-risk portion of your contrarian stock picks.

While it would be nice to have the confidence of 12 month momentum winners, we may also be picking turnaround stocks that are being pounded by short-lived bad earnings or scathing reviews on an entire country full of stocks (China).

What is your take? Any of these stocks worth buying or simply too much risk for your appetite? Probably the biggest recommendation I could give is to wait for the market to bounce back first as the research paper mentioned at the start did not link to any of the scanning criteria to winning stocks in bad markets.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.