Small-cap stocks tend to offer investors greater growth opportunities than large-cap alternatives, although this comes with its fair share of added risk. To lessen the risk, today we focused on small caps that have strong track records of profitability, suggesting that these companies will consistently grow over time. We further honed in on those that are trading below their true value, according to their fundamentals. We came up with a diverse but interesting list - let us know what you think in the comments.
The Net Margin is a profitability metric that illustrates, by percentage, how much of every dollar earned gets turned into a bottom line profit. This is just one of many profitability metrics used by investors and analysts to better understand what the company is being left with at the end of the day. Generally, a firm that can expand its net profit margins over a period of time will see its stock price rise as well due to the trend of increasing profitability. Net Margin = Net Income/Total Revenue
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.
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.
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.
We first looked for small cap stocks. From here, we then looked for companies that have achieved strong bottom line profitability (Net Margin [TTM]>10%)(1-year fiscal EPS growth rate>10%). From here, we then looked for companies with a low price-multiple premium (forward P/E<10)(P/BV<1). We did not screen out any sectors.
Do you think these small-cap stocks offer both value and growth? Use our list to help with your own analysis.
1) Nelnet Inc. (NNI)
Nelnet Inc. has a Net Margin of 31.65%, a Earnings Per Share Growth Rate of 11.00%, a Forward Price/Earnings Ratio of 4.83, and a Price/Book Value Ratio of 0.96. The short interest was 3.11% as of 06/29/2012. Nelnet, Inc., an education services company, focuses on providing fee-based processing services, and education-related products and services in the areas of loan financing, loan servicing, payment processing, and enrollment services. It operates in four segments: Student Loan and Guaranty Servicing, Tuition Payment Processing and Campus Commerce, Enrollment Services, and Asset Generation and Management. The Student Loan and Guaranty Servicing segment provides services that include loan origination activities, loan conversion activities, application processing, borrower updates, payment processing, due diligence procedures, and claim processing for the company's student loan portfolios and the portfolios of third parties.
2) Apollo Commercial Real Estate Finance, Inc. (ARI)
|Industry:||REIT - Diversified|
Apollo Commercial Real Estate Finance, Inc. has a Net Margin of 52.82%, a Earnings Per Share Growth Rate of 58.15%, a Forward Price/Earnings Ratio of 9.04, and a Price/Book Value Ratio of 0.99. The short interest was 4.65% as of 06/29/2012. Apollo Commercial Real Estate Finance, Inc. operates as a commercial real estate finance company in the United States. It originates, acquires, invests in, and manages performing commercial first mortgage loans, commercial mortgage-backed securities, mezzanine financings, and other commercial real estate-related debt investments. The company is qualified as a real estate investment trust (REIT) under the Internal Revenue Code.
3) Perfect World Co., Ltd. (PWRD)
|Industry:||Multimedia & Graphics Software|
Perfect World Co., Ltd. has a Net Margin of 30.93%, a Earnings Per Share Growth Rate of 23.21%, a Forward Price/Earnings Ratio of 3.58, and a Price/Book Value Ratio of 0.80. The short interest was 1.22% as of 06/29/2012. Perfect World Co., Ltd., through its subsidiaries, operates as an online game developer and operator in China, the United States, Japan, and southeast Asia. The company develops online games based on its proprietary game engines and development platforms. It offers 3D massively multiplayer online role playing games (MMORPGs), which include Perfect World, Legend of Martial Arts, Perfect World II, Zhu Xian, Chi Bi, Pocketpet Journey West, and Forsaken World; and Hot Dance Party, a 3D online casual game.
4) Republic Bancorp Inc. (RBCAA)
|Industry:||Regional - Southeast Banks|
Republic Bancorp Inc. has a Net Margin of 35.88%, a Earnings Per Share Growth Rate of 45.17%, a Forward Price/Earnings Ratio of 7.91, and a Price/Book Value Ratio of 0.83. The short interest was 11.64% as of 06/29/2012. Republic Bancorp, Inc. operates as the holding company for Republic Bank & Trust Company and Republic Bank, which provides banking, tax refund solutions, and mortgage banking services to individuals and businesses in the United States. The company offers a range of deposit products, including demand deposits, money market accounts, brokered and Internet money market accounts, savings deposits, individual retirement accounts, time deposits, and certificates of deposit. It also provides single family residential real estate loans; commercial loans; residential construction real estate loans; and consumer loans, which consists of home improvement and home equity loans, as well as secured and unsecured personal loans.
*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.