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A high debt/equity ratio generally means that a company has been aggressive in financing its growth with debt. While this may enhance earnings during an economic boom, it can easily become an economic risk, so debt should be viewed as a double-edged sword. Should a firm struggle or fail to cover the cost of financing its debt in lean economic times (such as right now) the stock could easily plunge if investors lose confidence.

We ran a screen for small stocks that operate with a moderate to high Debt/Equity ratio (>15%). From this narrowed pool, we then screened for stocks that have underperformed the S&P500 over the last month. We did not screen out any industries.

1. AFC Enterprises, Inc. (AFCE)

Sector

Consumer Cyclical

Industry

Restaurants

Market Cap

$292M

Beta

1.58

The company operates and franchises quick-service restaurants. AFCE’s Debt/Equity ratio is 66.89%. The stock has fallen by 26.04 % in the last 3 months. The short interest was 4.00% as of 08/31/2011.

2. US Airways Group Inc. (LCC)

Sector

Industrials

Industry

Airlines

Market Cap

$994M

Beta

0.96

The company operates US Airways, America West Holdings, Piedmont, PSA, MSC and AAL. LCC’s Debt/Equity ratio is 63.80%. The stock has fallen by 31.20 % in the last 3 months. The short interest was 18.70% as of 08/31/2011.

3. Newcastle Investment Corporation. (NYSE:NCT)

Sector

Real Estate

Industry

REIT - Diversified

Market Cap

$348M

Beta

3.72

The company invests in loans, real estate securities, and other real estate related assets. NCT’s Debt/Equity ratio is 26.97%. The stock has fallen by 21.37 % in the last 3 months. The short interest was N/A as of 08/31/2011.

4. Nelnet, Inc. (NYSE:NNI)

Sector

Financial Services

Industry

Credit Services

Market Cap

$881M

Beta

1.31

The company is offers education planning and financing services. NNI’s Debt/Equity ratio is 23.87%. The stock has fallen by 16.08 % in the last 3 months. The short interest was 4.20% as of 08/31/2011.

5. Alaska Communications Systems. (NASDAQ:ALSK)

Sector

Communication Services

Industry

Telecom Services

Market Cap

$331M

Beta

0.66

The company offers telecom services to retail and business customers. ALSK’s Debt/Equity ratio is 23.15%. The stock has fallen by 16.56% in the last 3 months. The short interest was 26.70% as of 08/31/2011.

6. Cheniere Energy Inc. (NYSEMKT:LNG)

Sector

Energy

Industry

Oil & Gas Refining & Marketing

Market Cap

$419M

Beta

-0.19

The company is constructing three onshore LNG receiving terminals along with other assets in the US. LNG’s Debt/Equity ratio is 20.25%. The stock has fallen by 39.79% in the last 3 months. The short interest was 35.70% as of 08/31/2011.

7. Dine Equity Inc. (NYSE:DIN)

Sector

Consumer Cycl

Industry

Restaurants

Market Cap

$742M

Beta

2.84

Dine Equity is the franchisor and operator of Applebee's and IHOP restaurants. DIN’s Debt/Equity ratio is 19.50%. The stock has fallen by 20.37 % in the last 3 months. The short interest was 15.80% as of 08/31/2011.

8. Exelixis, Inc. (NASDAQ:EXEL)

Sector

Healthcare

Industry

Biotechnology

Market Cap

$798M

Beta

1.81

The company is developing small molecule therapeutics for cancer and other serious diseases. EXEL’s Debt/Equity ratio is 18.7 %. The stock has fallen by 30.45% in the last 3 months. The short interest was 13.10% as of 08/31/2011.

We hope this list helps investors as they do their own due diligence on small cap stocks.

Source: 8 Debt-Laden Small Caps With Bearish Momentum