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Interested in gaining exposure to the small-cap sector? For ideas on how to start your own small-cap search, we ran a screen.

We began by screening the small-cap sector for stocks with strong liquidity, with current ratios above 3. The current ratio is current assets/current liabilities, so ratios above 3 indicate the company has at least 3 times the liquid assets to cover their short-term liabilities.

We then screened for those that also appear undervalued relative to the Graham Number. The Graham Number is a measure of maximum fair value created by the "godfather of value investing" Benjamin Graham.

It is based off of a stock's EPS and book value per share (BVPS).

Graham Number = SQRT(22.5 x TTM EPS x MRQ BVPS)

The equation assumes that P/E should not be higher than 15 and P/BV should not be higher than 1.5. Stocks trading well below their Graham Number may be undervalued.

(click to enlarge)

Tool provided by Kapitall.

Do you think these stocks should be trading higher? Use this list as a starting point for your own analysis.

List sorted by potential upside implied by the Graham Number.

1. Hi Tech Pharmacal Co. Inc. (NASDAQ:HITK): Develops, manufactures, markets, and sells generic, prescription, over-the-counter, and nutritional products in liquid and semisolid dosage forms in the United States. Market cap at $363.16M, most recent closing price at $27.85. Current ratio at 6.94. Diluted TTM earnings per share at 3.84, and a MRQ book value per share value at 17.42, implies a Graham Number fair value = sqrt(22.5*3.84*17.42) = $38.80. Based on the stock's price at $27.85, this implies a potential upside of 39.3% from current levels.

2. Ennis Inc. (NYSE:EBF): Engages in the production and sale of business forms, other business products, and apparel. Market cap at $367.41M, most recent closing price at $14.05. Current ratio at 4.4. Diluted TTM earnings per share at 1.21, and a MRQ book value per share value at 13.88, implies a Graham Number fair value = sqrt(22.5*1.21*13.88) = $19.44. Based on the stock's price at $14.05, this implies a potential upside of 38.36% from current levels.

3. FutureFuel Corp. (NYSE:FF): Engages in the manufacture and sale of specialty chemicals and bio-based products primarily in the United States. Market cap at $373.12M, most recent closing price at $9.03. Current ratio at 6.28. Diluted TTM earnings per share at 0.94, and a MRQ book value per share value at 7.08, implies a Graham Number fair value = sqrt(22.5*0.94*7.08) = $12.24. Based on the stock's price at $9.03, this implies a potential upside of 35.51% from current levels.

4. Threshold Pharmaceuticals Inc. (NASDAQ:THLD): Engages in the discovery and development of drugs targeting the microenvironment of solid tumors for patients living with cancer. Market cap at $377.14M, most recent closing price at $6.92. Current ratio at 5.79. Diluted TTM earnings per share at -2.69, and a MRQ book value per share value at -1.43, implies a Graham Number fair value = sqrt(22.5*-2.69*-1.43) = $9.30. Based on the stock's price at $6.92, this implies a potential upside of 34.44% from current levels.

5. IXYS Corp. (NASDAQ:IXYS): Engages in the development, manufacture, and marketing of power semiconductors, advanced mixed signal integrated circuits, application specific integrated circuits, and systems and radio frequency semiconductors. Market cap at $315M, most recent closing price at $10.08. Current ratio at 6.07. Diluted TTM earnings per share at 0.93, and a MRQ book value per share value at 8.12, implies a Graham Number fair value = sqrt(22.5*0.93*8.12) = $13.03. Based on the stock's price at $10.08, this implies a potential upside of 29.32% from current levels.

6. National Presto Industries Inc. (NYSE:NPK): Engages in the production and sale of housewares/small appliances, defense products, and absorbent products in North America. Market cap at $460.96M, most recent closing price at $67.0. Current ratio at 4.87. Diluted TTM earnings per share at 6.69, and a MRQ book value per share value at 44.31, implies a Graham Number fair value = sqrt(22.5*6.69*44.31) = $81.67. Based on the stock's price at $67., this implies a potential upside of 21.89% from current levels.

*BVPS and EPS data sourced from Yahoo! Finance, all other data sourced from Finviz.

Source: 6 Highly Liquid Small-Caps Undervalued By The Graham Number