Small-cap stocks from within the Russell 2000 index tend to have much less analyst coverage than their larger brethren within the S&P 500. Thus small-cap stocks are more prone to mispricings, giving investors opportunities to find undervalued companies with much more room to grow.
While these smaller companies have less available information and analyst coverage, utilizing The Applied Finance Group’s systematic valuation & corporate performance methodology, you can quickly and easily understand what a company is worth and how it is performing. That’s important, because AFG’s proprietary metrics and screening tools allow you to quickly narrow down the list of companies from within a broad index (such as the Russell 2000) to only companies that contain the characteristics that are more likely to outperform sector and index peers.
When narrowing down our list of Russell 2000 companies to the most likely to outperform, we looked for companies with the following criteria: those that are undervalued according to our valuation model, expected to improve economic profitability (economic margin) and have management teams employing a growth strategy suitable to its profitability level; i.e., not growing a losing business to ensure that they are focused on shareholder wealth. AFG’s valuation techniques and economic margin methodology have proven to be effective at identifying companies set to outperform their benchmarks and sector peers across all sectors, styles, countries and size classifications.
The Russell 2000 index outperformed the S&P 500 index by 800 bps over the past year. If you are looking to add some exposure to small-caps in your client portfolios, the list of firms below is a good starting point as it identifies the companies with the most attractive valuations within the index according to AFG valuation.
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