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Long/short equity, growth at reasonable price, value, deep value
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Research from Fama and French, with the 3 factor model regression (Farma and French also looks into momentum as a 4th factor), offers empirical data that suggests smaller stocks with lower price-to-book values have higher excess gains associated with them. They state the reason for this as a ‘risk premium’ or a bigger reward for higher speculation. Also, in every country but Japan they found excess gains to be associated with momentum. This is where stocks that outperform the market over the past 52 weeks (or 3 months and 6 months) continue to do so over the next year. (Size, Value, and Momentum in International Stock Returns, Fama and French, 2011)

The following scan will look at small cap (and under) value stocks for those that want a shot at some of the excess gains while potentially accepting more price volatility. Our scan will include 6 month and 3 month momentum windows, which are also widely used.

The Small Cap Value Scan

  • Small cap and under
  • Price to book less than 2
  • 6 month price change greater than 20%
  • 3 month price change greater than 10%
  • Average volume greater than 300K
  • PE less than 15
  • USA stocks only

The Scanned Stock List

Ticker

Company

Industry

P/E

APL

Atlas Pipeline Partners LP

Oil & Gas Pipelines

9.58

POR

Portland General Electric Company

Electric Utilities

11.55

CNO

CNO Financial Group, Inc.

Accident & Health Insurance

7.35

GLT

PH Glatfelter Co.

Paper & Paper Products

9.64

OME

Omega Protein Corp.

Processed & Packaged Goods

10.56

GTN

Gray Television Inc.

Broadcasting - TV

12.48

OLN

Olin Corp.

Chemicals - Major Diversified

10.14

A Few Financials

APL – This stock keeps climbing on positive forward-looking revisions. The company plans to spend $400 million with the expectation of increasing earnings $150 million. This is a high return on assets. It does not need to dilute shareholder equity to do so. As realized revenue boosts will come from 2012, and beyond, shareholders are climbing on now in anticipation of future growth.

POR – While sales remained fairly static the past couple of years, net income has climbed. The profit margin has jumped from 5% two years ago to over 9% today. This company has recently been revised positively for the current year and next year, although 2012, looks like a decline overall from 2011.

CNO – A low PE of 7.35 and a price-to-book of 0.45 gives this deep value status. The company is bouncing back nicely from a very grim 2007 and 2008 for the financial sector. Be aware that sales per share are half of what they were in 2004. Although earnings have greatly bounced back, they are still below 2004 and 2005. But prices are also greatly below the $23+ level they were back then too. At $7.67, the company has shrunk, but prices may have fallen too far based on its value. Time will tell but a 13% growth rate with these deep value ratios makes this a good play.

GLT – A sub-10 PE ratio and a price-to-book at 1.19 also give this decent value. I also like the positive upward revisions over the past 30 days for this year and next year’s earnings. The company has delivered positive earnings surprises for 3 of the past 4 quarters. While sales are in a fairly steady upward trend over the past 7 years, margins and profitability are slipping. While prices are popping, I’m a bit more hesitant on this one.

OME – Omega Protein Corp has a trailing PE of 10.56 and a price-to-book around 1.4. The past 5 years have delivered strong earnings growth of over 30% per year on average. The next 5 years looks to be around 10%. With only 2 analysts covering this, I don’t put as much weight on their estimates as earnings surprises have been large. The most recent quarter showed that the most recent sales growth might be a trend, instead of a one-hit wonder, with sales up 74.8% from a comparable quarter one year ago. Earnings are through the roof this quarter and this stock should be on your radar.

GTN Again, with only one analyst covering this it is hard to base much off his estimates. This stock has a tempestuous relationship with profitability. In 2012, the analyst does expect a very bright upside of 40 cents per share. Considering prices are only at $2.81 we have a forward PE of 7. Revenue has not grown significantly in many years. I give this one a hold rating.

OLN – Over the past 3 months the consensus rating has been very positive. From 3 strong buys to 5. The brokers with underperform and sell ratings both upgraded. The 2011, and 2012, earnings estimates have also jumped by 53.4%, and 54.3%, respectively over the past 90 days. The next 5 years for earnings growth seems a bit high at 39.5% per year, but with a trailing PE around 10 and a price-to-book just under 2, I like the price based on its potential for growth.

*You may also be interested in 3 stocks near 52-week lows where both value and traps exist.

Small Value Stock Wrap-Up
While small value stocks have been shown to deliver excess gains over many years in every country around the world, you also have to be very careful. Picking tiny stocks with deep value and high momentum can pose serious risks when volatility turns against you. Some of these stocks have a solid track record with analysts forecasting growth, while others have declining growth and almost no analyst coverage, which makes it a mystery as to why prices are rising.

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

Source: 7 Small Cap Value Stocks Rising on Positive Momentum