Small-cap stocks can offer greater rewards than larger-cap peers, although this introduces added levels of risk. To minimize the risk, today we searched for small cap companies whose fundamentals indicate they have plenty of cash on hand, to not only make it through any possible rough patches, but also possibly make strategic investments or acquisitions which could lead to long term growth. We focused further on companies whose prices suggest that they are undervalued, implying that now is the time to do more due diligence on these stocks. You might like the list our screen produced.
The PEG ratio (price/earnings to growth ratio) is a valuation metric for determining the relative trade-off between the price of a stock, the earnings generated per share [EPS], and the company's expected growth. In general, the P/E ratio is higher for a company with a higher growth rate. Thus using just the P/E ratio would make high-growth companies appear overvalued relative to others. It is assumed that by dividing the P/E ratio by the earnings growth rate, the resulting ratio is better for comparing companies with different growth rates. A lower ratio is 'better' (cheaper) and a higher ratio is 'worse' (expensive) - a PEG ratio of 1 means the company is fairly priced.
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).
We first looked for small cap stocks. Next, we then screened for businesses that are undervalued when company growth rate is taken into account (PEG Ratio < 1)(P/E<10). Next, we then screened for businesses that have a substantial amount of cash on hand (Current Ratio>2)(Quick Ratio>2). We did not screen out any sectors.
Do you think these small-cap stocks will break through to new highs? Use this list as a starting-off point for your own analysis.
1) Newpark Resources Inc. (NR)
|Industry:||Oil & Gas Equipment & Services|
Newpark Resources Inc. has a Price/Earnings to Growth Ratio of 0.64, a Price/Earnings Ratio of 7.05, a Current Ratio of 3.92, and a Quick Ratio of 2.68. The short interest was 13.69% as of 06/28/2012. Newpark Resources, Inc. provides various products and services primarily to the oil and gas exploration industry. It operates in three segments: Fluids Systems and Engineering, Mats and Integrated Services, and Environmental Services. The Fluids Systems and Engineering segment provides drilling fluids products and technical services for technical drilling projects involving complex subsurface conditions, such as horizontal directional, geologically deep, or deep water drilling.
2) Cash America International, Inc. (CSH)
Cash America International, Inc. has a Price/Earnings to Growth Ratio of 0.63, a Price/Earnings Ratio of 9.62, a Current Ratio of 4.59, and a Quick Ratio of 3.70. The short interest was 17.35% as of 06/28/2012. Cash America International, Inc. provides specialty financial services to individuals in the United States and Mexico. The company operates in two segments, Retail Services and E-Commerce. The Retail Services segment provides pawn lending, consumer loans, and check cashing, as well as other ancillary services, such as money orders, wire transfers, and pre-paid debit cards.
3) Cascade Corp. (CASC)
|Industry:||Farm & Construction Machinery|
Cascade Corp. has a Price/Earnings to Growth Ratio of 0.75, a Price/Earnings Ratio of 8.20, a Current Ratio of 3.74, and a Quick Ratio of 2.29. The short interest was 4.44% as of 06/28/2012. Cascade Corporation engages in the manufacture and distribution of materials handling load engagement devices and related replacement parts under the Cascade name primarily for the lift truck and construction industries worldwide. It offers lift truck related products that are designed to handle loads with pallets and for specialized application loads without pallets; and specialized products, which include devices specifically designed to handle appliances, carpet and paper rolls, baled materials, textiles, beverage containers, drums, canned goods, bricks, masonry blocks, lumber, and plywood, as well as boxed, packaged, and containerized products. The company also provides construction related products to enable loaders, backhoes, and rough terrain lift trucks to move materials, as well as for use on excavators and loaders for conventional and specialized ground engagement applications. Its customers include lift truck original equipment manufacturers (OEM), original equipment dealers, and distributors; and OEMs who manufacture construction, mining, agricultural, and industrial vehicles.
4) Helix Energy Solutions Group, Inc. (HLX)
|Industry:||Oil & Gas Equipment & Services|
Helix Energy Solutions Group, Inc. has a Price/Earnings to Growth Ratio of 0.81, a Price/Earnings Ratio of 9.76, a Current Ratio of 2.61, and a Quick Ratio of 2.56. The short interest was 5.65% as of 06/28/2012. Helix Energy Solutions Group, Inc., together with its subsidiaries, operates as an offshore energy company. It provides reservoir development solutions and other contracting services to the energy market, as well as to its oil and gas properties. The company offers various contracting services in the Gulf of Mexico, North Sea, the Asia Pacific, and west Africa regions primarily in deepwater.
5) Entegris, Inc. (ENTG)
|Industry:||Semiconductor Equipment & Materials|
Entegris, Inc. has a Price/Earnings to Growth Ratio of 0.90, a Price/Earnings Ratio of 9.88, a Current Ratio of 6.04, and a Quick Ratio of 4.86. The short interest was 3.55% as of 06/28/2012. Entegris, Inc. develops, manufactures, and supplies products and materials used in processing and manufacturing in the semiconductor and other high-technology industries worldwide. It operates in three segments: Contamination Control Solutions, Microenvironments, and Specialty Materials. The Contamination Control Solutions segment offers liquid filtration products, components and systems, and gas filtration products that purify, monitor, and deliver critical liquids and gases to the semiconductor manufacturing process and similar manufacturing processes.
*Company profiles were sourced from Finviz. Financial data was sourced from Yahoo Finance.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.