Small-cap stocks can offer investors huge growth opportunities, but not without adding significant levels of risk. One strategy for containing the risk associated with small caps, is to search for companies whose price-multiples suggest that they are currently undervalued. To further hone in on the best in class, we only looked at companies with analyst ratings of 'Buy' or stronger. We came up with a pretty interesting list to help you on your search.
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 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.
We first looked for small cap stocks. We next screened for businesses with a low price-multiple premium (forward P/E<10)(PEG Ratio < 1). We then looked for companies that analysts rate as "Buy" or "Strong Buy" (mean recommendation < 3). We did not screen out any sectors.
Do you think these small-cap stocks will go up in valuation? Use our list to help with your own analysis.
1) Esterline Technologies Corp. (ESL)
|Industry:||Aerospace/Defense Products & Services|
Esterline Technologies Corp. has a Forward Price/Earnings Ratio of 9.96, a Price/Earnings to Growth Ratio of 0.91, and a Analysts' Rating of 1.90. The short interest was 3.48% as of 07/18/2012. Esterline Technologies Corporation designs, manufactures, and markets engineered products and systems for aerospace and defense customers primarily in the United States and internationally. The company operates in three segments: Avionics and Controls, Sensors and Systems, and Advanced Materials. The Avionics and Controls segment provides global positioning systems, head-up displays, enhanced vision systems, and electronic flight management systems for control and display applications. It also develops, manufactures, and markets technology interface systems, including lighted push-button and rotary switches, keyboards, lighted indicators, panels, and displays; and control sticks, grips, and wheels, as well as switching systems.
2) TPC Group Inc (TPCG)
|Industry:||Chemicals - Major Diversified|
TPC Group Inc has a Forward Price/Earnings Ratio of 9.86, a Price/Earnings to Growth Ratio of 0.58, and a Analysts' Rating of 2.00. The short interest was 5.72% as of 07/18/2012. TPC Group Inc. produces and sells value-added products derived from petrochemical raw materials to chemical and petroleum based companies in North America. The company operates in two segments, C4 Processing and Performance Products.
3) TriMas Corporation (TRS)
|Industry:||Industrial Equipment & Components|
TriMas Corporation has a Forward Price/Earnings Ratio of 9.76, a Price/Earnings to Growth Ratio of 0.84, and a Analysts' Rating of 1.80. The short interest was 3.33% as of 07/18/2012. TriMas Corporation designs, manufactures, and distributes various products for commercial, industrial, and consumer markets worldwide. Its Packaging segment offers steel and plastic closure caps, drum enclosures, rings and levers, and specialty plastic closures, as well as dispensing systems, such as pumps and specialty sprayers to store, transport, process, and dispense various products for industrial, agricultural, food, beverage, personal care, pharmaceutical, nutraceutical, and medical markets. The company's Energy segment provides metallic and non metallic gaskets; and various types of stud bolts, industrial fasteners, and specialty products for petroleum refining, petrochemical, oil field, and industrial markets.
4) Skullcandy, Inc. (SKUL)
|Industry:||Industrial Electrical Equipment|
Skullcandy, Inc. has a Forward Price/Earnings Ratio of 9.90, a Price/Earnings to Growth Ratio of 1.00, and a Analysts' Rating of 1.60. The short interest was 71.75% as of 07/18/2012. Skullcandy, Inc. develops and distributes headphones and other audio accessories to retailers in the United States and to distributors internationally. Its headphone products include in ear, on ear, over ear, and gaming headphones. The company also offers speaker docks, mobile device cases, apparel, and other accessories.
5) Unit Corp. (UNT)
|Industry:||Oil & Gas Drilling & Exploration|
Unit Corp. has a Forward Price/Earnings Ratio of 9.83, a Price/Earnings to Growth Ratio of 0.52, and a Analysts' Rating of 1.90. The short interest was 2.65% as of 07/18/2012. Unit Corporation, together with its subsidiaries, engages in the contract drilling, oil and natural gas, and mid-stream businesses in the United States. The company's Contract Drilling segment engages in land contract drilling of onshore oil and natural gas wells for oil and natural gas companies in Oklahoma, Texas, Louisiana, Wyoming, Colorado, Utah, Montana, and North Dakota. Its Oil and Natural Gas segment is involved in the acquisition, exploration, development, and production of oil and natural gas properties located primarily in Oklahoma, Texas, Louisiana, and North Dakota, as well as in Arkansas, New Mexico, Wyoming, Montana, Alabama, Kansas, Mississippi, Michigan, Colorado, Pennsylvania, and a small portion in Canada. As of December 31, 2011, this segment had approximately 121 gross proved undeveloped wells.
6) Fushi Copperweld, Inc. (FSIN)
|Industry:||Industrial Electrical Equipment|
Fushi Copperweld, Inc. has a Forward Price/Earnings Ratio of 9.81, a Price/Earnings to Growth Ratio of 0.98, and a Analysts' Rating of 2.30. The short interest was 16.25% as of 07/18/2012. Fushi Copperweld, Inc., through its subsidiaries, engages in designing, developing, manufacturing, marketing, and distributing copper-clad bimetallic wire products, principally copper-clad aluminum (CCA) and copper-clad steel (CCS). The company offers its products for use in grounding applications, power cables, magnet wires, electrified railroad catenary cables, and tracer wires in the utility market; and within catenary cable for electrified rail applications, as well as in automobiles, trucks, motorcycles, commercial off road equipment, and trailers. It is also involved in the production and sale of power cables.
7) Titan Machinery, Inc. (TITN)
|Industry:||Specialty Retail, Other|
Titan Machinery, Inc. has a Forward Price/Earnings Ratio of 9.65, a Price/Earnings to Growth Ratio of 0.72, and a Analysts' Rating of 1.40. The short interest was 19.11% as of 07/18/2012. Titan Machinery Inc. owns and operates a network of full service agricultural and construction equipment stores in the United States and Europe. It engages in the sale of new and used equipment. The company sells agricultural and construction equipment manufactured under the CNH family of brands, as well as equipment from various other manufacturers.
*Company profiles were sourced from Finviz.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.