In times of a lagging global economy, if investors can't achieve the growth they want, then searching out small cap companies is a smart move. After all, small caps have room to grow when compared to larger companies. The small caps that are perhaps best positioned for growth are those that have built up capital reserves over time. Having cash in the ready allows a company to make strategic investments, or make acquisitions that could lead to long-term growth. As always, looking at a company's fundamentals is another smart way to hone in on long-term winners. Keeping these ideas in mind, we ran a screen you might be interested in.
The details of our screen are as follows. We first looked for small cap stocks. We then screened for businesses that are undervalued (P/BV<1)(P/E<10). We next screened for businesses with a large amount of cash on hand (Current Ratio>2)(Quick Ratio>2). We did not screen out any sectors.
The Price/Book Value Ratio is a great price-multiple valuation metric to find companies that could be potentially undervalued or overvalued. If a firm has a Price/Book Value Ratio of less than 1, it is stated to be trading below "break up" value. A lower P/BV Ratio can indicate a potentially mispriced company or indicate that something is fundamentally wrong with it.
The Price/Earnings ratio is one of the most commonly used price-multiple metrics. Often, EPS from the last four quarters is used to derive this number. A firm that has a high P/E ratio generally indicates that investors have high expectations of the firm relative to future earnings growth. By the opposite token, investors generally have lower expectations of a firm with a low P/E ratio. A firm that holds a P/E below 10 could be viewed as having "value investment" potential. One thing to remember is that EPS is an accounting measure that could be potentially manipulated. Thus the P/E is only as good as the quality of the earnings.
The Current ratio is a liquidity ratio used to determine a company's financial health. The metric illustrates how easily a firm can pay back its short obligations all at once through current assets. A company that has a current ratio of one or less is generally a liquidity red flag. Now, this doesn't mean the company will go bankrupt tomorrow, but it also doesn't bode well for the company and may indicate that it could have an issue paying back upcoming obligations.
The Quick ratio measures a company's ability to use its cash or assets to extinguish its current liabilities immediately. Quick assets include assets that presumably can be converted to cash at close to their book values. A company with a Quick Ratio of less than 1 cannot currently pay back its current liabilities. The quick ratio is more conservative than the Current Ratio because it excludes inventory from current assets, since some companies have difficulty turning their inventory into cash. If short-term obligations need to be paid off immediately, sometimes the current ratio would overestimate a company's short-term financial strength. In general, the higher the ratio, the greater the company's liquidity (i.e., the better able to meet current obligations using liquid assets).
Do you think these small-cap stocks are undervalued? Use our list along with your own analysis.
1) Ceradyne Inc. (CRDN)
|Industry:||Industrial Equipment & Components|
Ceradyne Inc. has a Price/Book Value Ratio of 0.84 and Price/Earnings Ratio of 9.53 and Current Ratio of 3.50 and Quick Ratio of 2.61. The short interest was 5.94% as of 05/28/2012. Ceradyne, Inc. engages in the development, manufacture, and market of technical ceramic products, ceramic powders, and components in the United States and internationally. Its products include lightweight ceramic armor and combat helmets for soldiers and other military applications; ceramic industrial components for erosion and corrosion resistant applications; ceramic powders, including boron carbide, boron nitride, titanium diboride, calcium hexaboride, zirconium diboride, and fused silica, which are used in manufacturing armor and a range of industrial and consumer products; evaporation boats for metallization of materials for food packaging; and ceramic diesel engine components. The company also offers functional and frictional coatings primarily for automotive applications; translucent ceramic orthodontic brackets; ceramic crucibles for melting silicon in the photovoltaic solar cell manufacturing process; ceramic-impregnated dispenser cathodes for microwave tubes, lasers, and cathode ray tubes; specialty glass compositions for solar, electronic, industrial, and health care markets; ceramic missile radomes for the defense industry; and fused silica powders for precision investment casting.
2) Vishay Intertechnology Inc. (VSH)
|Industry:||Semiconductor - Broad Line|
Vishay Intertechnology Inc. has a Price/Book Value Ratio of 0.94 and Price/Earnings Ratio of 8.36 and Current Ratio of 4.38 and Quick Ratio of 3.30. The short interest was 4.45% as of 05/28/2012. Vishay Intertechnology, Inc. designs, manufactures, and supplies discrete semiconductors and passive components in the United States and internationally. The company's semiconductor products include MOSFETs, such as low-and medium-voltage TrenchFET MOSFETs, high-voltage planar MOSFETs, high voltage Super Junction MOSFETs, power integrated circuits, and integrated function power devices; diodes comprising rectifiers, small signal diodes, protection diodes, thyristors/silicon-controlled rectifiers, and power modules; and optoelectronic components, including infrared (IR) emitters and detectors, IR remote control receivers, optocouplers, solid-state relays, optical sensors, light-emitting diodes, seven-segment displays, and IR data transceiver modules. These semiconductor components are used for various functions, including power control, power conversion, power management, signal switching, signal routing, signal blocking, signal amplification, two-way data transfer, one-way remote control, and circuit isolation.
3) Superior Industries International, Inc. (SUP)
Superior Industries International, Inc. has a Price/Book Value Ratio of 0.96 and Price/Earnings Ratio of 6.84 and Current Ratio of 5.71 and Quick Ratio of 4.76. The short interest was 3.83% as of 05/28/2012. Superior Industries International, Inc. engages in the design, manufacture, and sale of aluminum road wheels to original equipment manufacturers primarily in North America. It supplies cast aluminum wheels to automobile and light truck manufacturers. The company was founded in 1957 and is headquartered in Van Nuys, California.
4) OmniVision Technologies Inc. (OVTI)
|Industry:||Semiconductor - Integrated Circuits|
OmniVision Technologies Inc. has a Price/Book Value Ratio of 0.99 and Price/Earnings Ratio of 8.92 and Current Ratio of 6.20 and Quick Ratio of 3.75. The short interest was 15.72% as of 05/28/2012. OmniVision Technologies, Inc. engages in designing, developing, and marketing semiconductor image-sensor devices worldwide. The company primarily offers CameraChip image sensors, which are single-chip solutions that integrate various functions, such as image capture, image processing, color processing, signal conversion, and output of a processed image or video stream for use in various consumer and commercial mass-market applications; and CameraCube imaging devices that are image sensors with integrated wafer-level optics. It also provides companion chips used to connect its image sensors to various interfaces, including the universal serial bus and other industry standard interfaces; and companion digital signal processors that perform compression in standardized still photo and digital video formats.
*Company profiles were sourced from Finviz. Financial data was sourced from Finviz.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.