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Each month I search for small cap stocks priced reasonably based on price to earnings growth (PEG) and that have a recent history of positive earnings surprises. I use stockscreen123 as the tool for this particular screen. The basic premise of the list is that stocks with a history of earnings surprises have the strong probability of positive earnings surprises in the future. If the stocks are already trading at favorable valuations, then continued earnings surprises could mean that the stocks below are undervalued, perhaps significantly.

Last month's list performed well, gaining 2.15% versus 1.06% for SPY over the same period. The list tends to be high beta and could be more volatile than the overall market. However, it is not a comprehensive portfolio, but rather a starting point for further research and an attempt to uncover some "hidden" gems.

10/14 Afternoon Update

I have featured Datalink (DTLK) in previous months, and the stock sold off hard at the end of September before rebounding violently in the first part of October. It is still down over 11% for one month, but up over 21% for the week and over 28% for the quarter. The company engages in the design, installation, and support of data center solutions to mid and large-size companies.

DTLK reports earnings on October 19th and currently trades at an estimated forward P/E of 10.88. It has a current PEG ratio of .85 and a long-term PEG (calculated as current year's projected P/E divided by long-term growth rate estimate) of .60. It has no debt, a price/sales ratio of .47 and $1.47 cash/share. If the company can surprise on earnings again and offer solid guidance, it could be a small cap value stock to consider.

The stock looks to be hitting resistance at $9/share and the short-term momentum is beginning to rollover. I would expect it to cool off, at least until earnings on the 19th.

Click to enlarge

Chart courtesy of Finviz

Below is the full list for the close on October 14th:

Ticker Name Last Overall Rank MktCap ProjPECurFY PEGLT
LABL Multi-Color Corporation 27.22 96.93 437.4 12.16 0.81
SUSS Susser Holdings Corporation 20.49 96.9 355.04 10.76 0.93
LAD Lithia Motors, Inc. 18.61 96.42 493.45 10.89 0.42
DTLK Datalink Corporation 9.03 96.41 158.15 11.99 0.6
CRD.B Crawford & Company 6.5 96.01 289.28 8.97 0.72
GSIG GSI Group Inc. (USA) 9.08 92.13 302.91 9.34 0.75
CBM Cambrex Corporation 5.52 80.19 162.46 11.91 0.98
SIMO Silicon Motion Technology Corp. AD 14.75 69.78 456.67 15.43 0.77

Disclosure: No positions

Disclaimer: No current positions in stocks mentioned. Please note that Scott's Investments and its author is not a financial adviser. Please consult your own investment adviser and do your own due diligence before making any investment decisions. Please read the full disclaimer at the bottom of Scott's Investments.

Source: 8 Small Cap Value Stocks With Strong Earnings