Small-cap stocks tend to offer investors greater growth opportunities than large-cap alternatives, but the extra reward comes with its fair share of added risk. To dampen that risk, we searched for companies whose fundamentals indicate that they can keep returning profits over time. As a way to hone in on possible deals in the market, we only looked at companies that seem undervalued by their price-multiple fundamentals. You might be interested in the list we came up with.
The Price/Sales ratio is a price-multiple valuation metric used to help identify if a firm is cheap by its twelve month trailing sales numbers. In the most basic terms it let's an investor know how much the investment community is willing to pay for every dollars worth of sales. A firm with a P/S ratio of one or lower would be viewed as cheap because investors are paying $1 or less for every dollars worth of a firm's sales. On the other hand, a firm is generally considered to be expensive when the P/S ratio is above three. These are general guidelines used by the investment community not hard rules to be clear. Price/Sales Ratio = Current Stock Price/Revenue (sales) per Share
The forward P/E is a price multiple valuation metric, which is similar to the current P/E ratio, except that it uses the forecasted earnings instead. While this number might not be as accurate because it uses "forecasted" numbers, it does offer the benefit of illustrating analysts' expectations of a firm. If the market believes that earnings will grow moving forward, then the forward P/E should be lower than the current P/E. Financial Leverage, also known as the Equity Multiplier, illustrates how a firm is financing its assets. The lower the number the more a firm is financing its assets internally through stockholder equity. The higher this metric is the more the firm is relying on debt to finance its assets.
EPS growth (earnings per share growth) illustrates the growth of earnings per share over time. EPS growth rates help investors identify stocks that are increasing or decreasing in profitability. This profitability metric is generally a key driver in the price of the stock as it directly correlates to the profitability of the company as a whole.
Return on Assets [ROA] illustrates how much a company is generating in earnings from its assets alone. This metric gives investors a picture of how profitable the company is relative to the assets in current possession. As well, it lets investors see how efficient and effective management is at generating earnings from the company's assets. While most management teams can probably make money by throwing money at an issue very few can make very large profits with little investment.
We first looked for small cap consumer stocks. Next, we then screened for businesses that are trading at a discount (P/S<1)(forward P/E<10). We then screened for businesses that have shown strong bottom line growth over the last year (1-year fiscal EPS growth rate>10%)(ROA > 10%).
Do you think these small-cap stocks are worth more than the market currently says? Use this list as a starting-off point for your own analysis.
1) Titan International Inc. (TWI)
|Industry:||Rubber & Plastics|
Titan International Inc. has a Price/Sales Ratio of 0.58, a Forward Price/Earnings Ratio of 7.78, a Earnings Per Share Growth Rate of 793.95%, and a Return on Assets of 10.07%. The short interest was 26.06% as of 06/27/2012. Titan International, Inc. and its subsidiaries manufacture and sell wheels, tires, and assemblies for off-highway vehicles used in the agricultural, earthmoving/construction, and consumer markets in the United States. It offers rims, wheels, and tires for use on various agricultural and forestry equipment, including tractors, combines, skidders, plows, planters, and irrigation equipment. The company also provides rims, wheels, and tires for various off-the-road earthmoving, mining, military, and construction equipment, including skid steers, aerial lifts, cranes, graders and levelers, scrapers, self-propelled shovel loaders, articulated dump trucks, load transporters, haul trucks, and backhoe loaders.
2) Standard Motor Products Inc. (SMP)
Standard Motor Products Inc. has a Price/Sales Ratio of 0.36, a Forward Price/Earnings Ratio of 7.50, a Earnings Per Share Growth Rate of 153.77%, and a Return on Assets of 11.35%. The short interest was 4.19% as of 06/27/2012. Standard Motor Products, Inc. manufactures and distributes replacement parts for motor vehicles in the automotive aftermarket industry. The company's Engine Management segment manufactures and sells engine management replacement parts, including electronic ignition control modules, fuel injectors, ignition wires, voltage regulators, coils, switches, emission sensors, EGR valves, distributor caps and rotors, and other engine management components primarily under the Standard, BWD, Intermotor, OEM, TechSmart, and GP Sorensen brand names. This segment also manufactures fuel pressure regulators, air by-pass valves, idle air control valves, and PCV valves; spark plug wires and battery cables; and various electrical wires, terminals, connectors, and tools for servicing an automobile's electrical system, as well as distributes a range of engine management products, including ignition coils, ignition modules, switches and sensors, and filters.
3) Arctic Cat Inc. (ACAT)
Arctic Cat Inc. has a Price/Sales Ratio of 0.74, a Forward Price/Earnings Ratio of 9.86, a Earnings Per Share Growth Rate of 144.45%, and a Return on Assets of 11.33%. The short interest was 9.92% as of 06/27/2012. Arctic Cat Inc. designs, engineers, manufactures, and markets snowmobiles and all-terrain vehicles (ATVs) under the Arctic Cat brand name in the United States and internationally. It also offers related parts, garments, and accessories. The company provides replacement parts and accessory items, such as electric start and reverse kits, luggage racks and bags, backrests, machine covers, windshields, and colored accessories; and maintenance supplies consisting of oil and fuel additives, track studs, and carbide runners for snow mobiles.
4) Tempur Pedic International Inc. (TPX)
|Industry:||Home Furnishings & Fixtures|
Tempur Pedic International Inc. has a Price/Sales Ratio of 0.94, a Forward Price/Earnings Ratio of 7.27, a Earnings Per Share Growth Rate of 47.11%, and a Return on Assets of 28.08%. The short interest was 12.31% as of 06/27/2012. Tempur-Pedic International Inc. engages in the manufacture, marketing, and distribution of bedding products in North America and internationally. It offers mattresses, pillows, and adjustable bed bases, as well as various cushions and other comfort products. The company sells its products under the TEMPUR and Tempur-Pedic brand names through furniture and bedding retailers, and non-spring and department stores; direct response program, Internet, and company-owned stores; hospitals, nursing homes, healthcare professionals, and medical retailers; and third party distributors.
*Company profiles were sourced from Finviz. Financial data was sourced from Finviz and Yahoo Finance.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.