When you are looking for the greatest growth opportunities, small-cap stocks are a logical place to start. To temper the risk that typically accompanies investments in stocks at this level, scrutinizing a company's ability to grow is a first step. The EPS rate is one measurement that is helpful in finding companies that are slated for significant growth. With this is mind, we searched for small-cap stocks that have EPS growth rates of 25% or better in the next year. In addition, we only included companies that look undervalued according to their fundamentals. We arrived at a list of stocks that warrant more research.
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.
EPS growth (earnings per share growth) illustrates the growth of earnings per share over time. The 1-Year Expected EPS Growth Rate is an annual growth estimate, where the growth projections are made by analysts, the company or other credible sources.
We first looked for small-cap stocks. We then looked for businesses that appear undervalued to earnings growth (PEG <1)(P/E <0). We next screened for businesses that have expected earnings per share growth of more than 25 percent for next year(1-year projected EPS Growth Rate >25%). We did not screen out any sectors.
Do you think these small-cap stocks will outperform? Please use our list to assist with your own analysis.
1) Viasystems Group Inc. (VIAS)
|Industry:||Printed Circuit Boards|
Viasystems Group Inc. has a Price/Earnings to Growth Ratio of 0.83, a Price/Earnings Ratio of 8.32, and a 1-Year Projected Earnings Per Share Growth Rate of 33.33%. The short interest was 0.56% as of 08/10/2012. Viasystems Group, Inc. provides multi-layer printed circuit boards (PCBs) and electro-mechanical solutions worldwide. Its PCBs products serve as the foundation for electronic equipment, providing circuitry and mounting surfaces to interconnect discrete electronic components, such as integrated circuits, capacitors, and resistors. The company's electro-mechanical solutions comprise various products and services, which primarily include assembly of backplanes, assembly of printed circuit boards, fabrication of custom and standard metal enclosures, cabinets, racks, sub-racks, and bus bars; systems integration; final assembly; and product testing and fulfillment.
2) Stillwater Mining Co. (SWC)
|Industry:||Industrial Metals & Minerals|
Stillwater Mining Co. has a Price/Earnings to Growth Ratio of 0.73, a Price/Earnings Ratio of 9.11, and a 1-Year Projected Earnings Per Share Growth Rate of 100.00%. The short interest was 7.59% as of 08/10/2012. 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.
3) Tata Communications Limited (TCL)
|Industry:||Telecom Services - Foreign|
Tata Communications Limited has a Price/Earnings to Growth Ratio of 0.90, a Price/Earnings Ratio of 9.03, and a 1-Year Projected Earnings Per Share Growth Rate of 41.80%. The short interest was 0.20% as of 08/10/2012. Tata Communications Limited provides communications services to multi-national enterprises, service providers, and Indian consumers worldwide. It offers international and national long distance voice services. The company also offers connectivity services comprising IP virtual private network, Hybrid VNO, application-aware, Ethernet, Internet access, and private line services; managed IT infrastructure services, which include co-location, managed hosting, and managed storage services; managed application services that comprise audio and Web conferencing, business messaging and collaboration, hosted contact center, and managed voice services; managed security services that include cloud-based services, professional services, and CPE-based services; professional services and outsourcing services; and media and entertainment solutions to enterprise customers.
4) Newport Corp. (NEWP)
|Industry:||Industrial Equipment Wholesale|
Newport Corp. has a Price/Earnings to Growth Ratio of 0.87, a Price/Earnings Ratio of 7.87, and a 1-Year Projected Earnings Per Share Growth Rate of 46.74%. The short interest was 3.23% as of 08/10/2012. Newport Corporation and its subsidiaries provide technology products and systems to scientific research, microelectronics, aerospace and defense/security, life and health sciences, and industrial markets in the United States, Europe, and the Pacific Rim. The company operates in three divisions: Photonics and Precision Technologies (PPT), Lasers, and Ophir. The PPT division provides photonics instruments and systems; vibration isolation systems and subsystems; precision positioning devices, systems, and subsystems; optics and optical hardware; opto-mechanical subassemblies and subsystems; and advanced manufacturing systems. It also offers automated systems for various applications in the manufacture of solar panels, and communications and electronic devices, including microwave, optical, radio frequency, and multi-chip modules.
5) Helios High Income Fund, Inc. (HIH)
|Industry:||Closed-End Fund - Debt|
Helios High Income Fund, Inc has a Price/Earnings to Growth Ratio of 0.78, a Price/Earnings Ratio of 7.57, and a 1-Year Projected Earnings Per Share Growth Rate of 30.91%. The short interest was 0.06% as of 08/10/2012. Helios High Income Fund, Inc is a closed ended fixed income mutual fund launched and managed by Brookfield Investment Management Inc. The fund invests in the fixed income markets of the United States. It makes its investments in investment grade debt securities including corporate bonds, mortgage-backed and asset-backed securities and municipal and foreign government obligations, as well as securities of companies in bankruptcy reorganization proceedings or otherwise in the process of debt restructuring which are rated Ba1 or lower by Moody's Investors Service, Inc.
6) Greenlight Capital Re, Ltd. (GLRE)
|Industry:||Property & Casualty Insurance|
Greenlight Capital Re, Ltd. has a Price/Earnings to Growth Ratio of 0.94, a Price/Earnings Ratio of 9.39, and a 1-Year Projected Earnings Per Share Growth Rate of 50.34%. The short interest was 3.27% as of 08/10/2012. Greenlight Capital Re, Ltd., through its subsidiaries, operates in the property and casualty reinsurance business in the United States, Europe, the Caribbean, and internationally. The company's frequency business includes contracts containing smaller losses emanating from multiple events and enables the clients to increase their own underwriting capacity; and severity business consists of contracts with the potential for significant losses emanating from one event or multiple events. It offers personal and commercial property, general and marine liability, motor liability, motor physical damage, professional liability, financial, health, medical malpractice, and workers' compensation reinsurance products.
*Company profiles were sourced from Google Finance and Yahoo Finance. Financial data was sourced from Finviz.