To find the diamonds in the rough, seasoned investors take a close look at a company's earnings, especially when analyzing small-cap stocks. When a small-cap company consistently reports profitability, it often won't stay at that level much longer. Here is a list of companies from a variety of sectors that meet that criteria. They all have the further advantage of trading below estimated value according to their fundamentals. These small-cap stocks are worth further review.
The Price/Cash Flow ratio is a price-multiple valuation metric that also measures a firm's future financial health. An advantage of using cash flow is that it removes non-cash factors, which helps provide a clearer picture of how much money the firm is taking in from a valuation standpoint. Price/Cash Flow Ratio = Current Stock Price/Cash Flow 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.
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.
We first looked for small-cap stocks. From here, we looked for companies that are trading at low price-multiple valuations (P/CFO<10)(forward P/E<10). We then looked for companies that have been able to retain strong profit margins on the bottom line (Net Margin [TTM]>10%)(1-year fiscal EPS Growth Rate>10%). We did not screen out any sectors.
Do you think these small-cap stocks are undervalued and have room to trade higher? Please use our list to assist with your own analysis.
1) KapStone Paper and Packaging Corporation (KS)
|Industry:||Paper & Paper Products|
KapStone Paper and Packaging Corporation has a Price/Cash Flow Ratio of 39.29, a Forward Price/Earnings Ratio of 8.43, a Net Margin of 12.45%, and an Earnings Per Share Growth Rate of 88.58%. The short interest was 3.53% as of 07/26/2012. KapStone Paper and Packaging Corporation engages in the production and sale of unbleached kraft paper products primarily in the Americas, Europe, and Asia. The company offers containerboard to converters in the corrugated packaging industry and to other converters for various end uses, including laminated tier sheets and wrapping material; and kraft paper to converters, who produce multiwall bags for agricultural products, pet food, cement, chemicals, grocery bags, and specialty conversion products, such as wrapping paper products, dunnage bags, and roll wraps. It also provides saturating kraft products to various industries, such as construction, electronics manufacturing, and furniture manufacturing; and unbleached folding carton board products to the general folding carton segment of paperboard packaging markets.
2) EZCORP, Inc. (EZPW)
|Industry:||Specialty Retail, Other|
EZCORP, Inc. has a Price/Cash Flow Ratio of 23.73, a Forward Price/Earnings Ratio of 6.56, a Net Margin of 14.82%, and an Earnings Per Share Growth Rate of 23.58%. The short interest was 4.98% as of 07/26/2012. EZCORP, Inc. provides specialty consumer financial services. The company offers pawn loans that are non-recourse loans collateralized by tangible personal property, including jewelry, consumer electronics, tools, sporting goods, and musical instruments, as well as sells merchandise consisting of second-hand collateral forfeited from its pawn lending activities or purchased from customers, and new or refurbished merchandise from third party vendors. It also provides a range of financial services, such as signature loans consisting of payday loans, installment loans, and lines of credit; and auto title loans, which include single payment auto title loans, and auto title lines of credit.
3) Hollysys Automation Technologies, Ltd. (HOLI)
|Industry:||Industrial Electrical Equipment|
Hollysys Automation Technologies has a Price/Cash Flow Ratio of 3.26, a Forward Price/Earnings Ratio of 7.08, a Net Margin of 16.93%, and an Earnings Per Share Growth Rate of 52.20%. The short interest was 11.23% as of 07/26/2012. Hollysys Automation Technologies, Ltd. provides automation and control technologies and applications to customers in the industrial, railway, subway, and nuclear industries in China and south-east Asia. It offers distributed control systems, which are networks of controllers, sensors, actuators and other devices that can be programmed to control outputs based on input conditions and/or algorithms; programmable logic controllers that are small computer devices installed on machines or equipment; and train control centers, which monitor route condition, track status, train schedules, distance between trains, and the working status of other essential function devices.
4) PDL BioPharma, Inc. (PDLI)
PDL BioPharma, Inc. has a Price/Cash Flow Ratio of 5.02, a Forward Price/Earnings Ratio of 3.82, a Net Margin of 54.78%, and an Earnings Per Share Growth Rate of 112.98%. The short interest was 11.83% as of 07/26/2012. PDL BioPharma, Inc. engages in intellectual property asset management and royalty bearing assets investment activities. The company is involved in the humanization of monoclonal antibodies and the discovery of a new generation of targeted treatments for cancer and immunologic diseases.
5) Stillwater Mining Co. (SWC)
|Industry:||Industrial Metals & Minerals|
Stillwater Mining Co. has a Price/Cash Flow Ratio of 6.29, a Forward Price/Earnings Ratio of 9.82, a Net Margin of 11.77%, and an Earnings Per Share Growth Rate of 155.75%. The short interest was 7.20% as of 07/26/2012. Stillwater Mining Company engages in developing, extracting, processing, smelting, refining, and marketing palladium, platinum, and platinum group metals (PGMs). The company conducts its mining operations at the Stillwater mine, which is located near Nye, Montana; and at the East Boulder mine located near Big Timber, Montana. It is also involved in developing Marathon, a PGM/copper property, which is located in Ontario, Canada; and exploring Altar, a copper/gold property located in San Juan, Argentina. In addition, the company operates a smelter and base metal refinery located in Columbus, Montana.
6) Generac Holdings Inc. (GNRC)
Generac Holdings Inc. has a Price/Cash Flow Ratio of 16.59, a Forward Price/Earnings Ratio of 9.33, a Net Margin of 36.35%, and an Earnings Per Share Growth Rate of 390.21%. The short interest was 2.14% as of 07/26/2012. Generac Holdings Inc. designs, manufactures, and markets a range of generators and other engine powered products for the residential, light commercial, industrial, and construction markets in the United States and Canada. It offers generators and other products fueled by natural gas, liquid propane, gasoline, diesel, and Bi-Fuel under the Generac and Magnum brands. The company's product line includes residential power products, commercial and industrial power products, and other products.
7) Hillenbrand, Inc. (HI)
Hillenbrand, Inc. has a Price/Cash Flow Ratio of 17.79, a Forward Price/Earnings Ratio of 9.28, a Net Margin of 11.21%, and an Earnings Per Share Growth Rate of 14.77%. The short interest was 3.07% as of 07/26/2012. Hillenbrand, Inc. designs, manufactures, distributes, and sells funeral service products to licensed funeral directors operating licensed funeral homes. The company's products include burial caskets, cremation caskets, containers, vaults, urns, and selection room display fixturing for funeral homes, as well as other personalization and memorialization products and services, including Web-based applications, and the creation and hosting of Websites for licensed funeral homes. It markets its products under the Batesville and Options brand name through direct sales force in the United States, Puerto Rico, Canada, Mexico, the United Kingdom, and Australia.
*Company profiles were sourced from Finviz. Financial data was sourced from Finviz.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.