When news get out about a small cap stock that appears to be trading below value, some people leap at the chance to get in on the bargain while others may feel some skepticism. After all, companies of this size are typically still working out all the kinks. It makes common sense to approach any small cap stock opportunity with a dose of caution. With this in mind, we focused on finding those undervalued small cap stocks that are earning high profits. When a company can generate significant profits, it adds credibility that the market price may be an aberration that will correct itself in time and the bargain price will be a memory. We encourage you to take a look at the list of small cap stocks below to begin your own analysis.
The Price/Cash Flow ratio is a price-multiple valuation metric that also measures a firms 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 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.
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.
Return on Assets [ROA] illustrates how much a company is generating in earnings from its assets alone. This metric gives investors a picture of how profitable the company is relative to the assets in current possession. As well, it lets investors see how efficient and effective management is at generating earnings from the company's assets. While most management teams can probably make money by throwing money at an issue very few can make very large profits with little investment.
We first looked for small cap stocks. We then looked for companies that are trading at low price-multiple valuations (P/CFO<10)(PEG Ratio < 1). We next screened for businesses that have strong profitability (1-year fiscal EPS Growth Rate>10%)(ROA [TTM]>10%). We did not screen out any sectors.
Do you think these small-cap stocks are undervalued and have room to trade higher? Use our list to help with your own analysis.
1) Standard Motor Products Inc. (SMP)
|Price/Cash Flow Ratio||42.46|
|Price/Earnings to Growth Ratio||0.30|
|Earnings Per Share Growth Rate||153.77%|
|Return on Assets||10.64%|
Standard Motor Products, Inc. manufactures and distributes replacement parts for motor vehicles in the automotive aftermarket industry. The company's Engine Management segment manufactures and sells engine management replacement parts, including electronic ignition control modules, fuel injectors, ignition wires, voltage regulators, coils, switches, emission sensors, EGR valves, distributor caps and rotors, and other engine management components primarily under the Standard, BWD, Intermotor, OEM, TechSmart, and GP Sorensen brand names. This segment also manufactures fuel pressure regulators, air by-pass valves, idle air control valves, and PCV valves; spark plug wires and battery cables; and various electrical wires, terminals, connectors, and tools for servicing an automobile's electrical system, as well as distributes a range of engine management products, including ignition coils, ignition modules, switches and sensors, and filters. Its Temperature Control segment manufactures, remanufactures, and markets various replacement parts for automotive temperature control systems, engine cooling systems, power window accessories, and windshield washer systems primarily under the Four Seasons, EVERCO, ACi, Hayden, Factory Air, and Imperial brand names. This segment also provides remanufactured compressors, clutch assemblies, blower and radiator fan motors, filter dryers, evaporators, accumulators, hose assemblies, expansion valves, heater valves, AC service tools and chemicals, fan assemblies, fan clutches, engine oil coolers, transmission coolers, window lift motors, motor/regulator assemblies, and windshield washer pumps. The company sells its products to warehouse distributors, large retail chains, original equipment manufacturers, and original equipment service part operators in the United States, Canada, Europe, Asia, and Latin America. Standard Motor Products, Inc. was founded in 1919 and is headquartered in Long Island City, New York.
2) Chemed Corp. (CHE)
|Industry||Home Health Care|
|Price/Cash Flow Ratio||21.07|
|Price/Earnings to Growth Ratio||0.98|
|Earnings Per Share Growth Rate||15.53%|
|Return on Assets||10.62%|
Chemed Corporation, through its subsidiaries, provides hospice care, and plumbing and drain cleaning services in the United States. The company operates in two segments, Vitas and Roto-Rooter. The Vitas segment offers hospice services to its patients through a network of physicians, registered nurses, home health aides, social workers, clergy, and volunteers. The Roto-Rooter segment provides plumbing and drain cleaning services to residential and commercial customers. The company was founded in 1970 and is headquartered in Cincinnati, Ohio.
3) Spirit Airlines, Inc. (SAVE)
|Price/Cash Flow Ratio||3.36|
|Price/Earnings to Growth Ratio||0.59|
|Earnings Per Share Growth Rate||41.56%|
|Return on Assets||13.89%|
Spirit Airlines, Inc. provides passenger airline services. It provides travel opportunities principally to and from south Florida, the northeast United States, the Caribbean, and Latin America. The company also offers optional travel-related products or services. As of December 31, 2011, it had a fleet of 37 Airbus single-aisle aircrafts. The company was formerly known as Charter One and changed its name to Spirit Airlines, Inc. in 1992. Spirit Airlines, Inc. was founded in 1964 and is headquartered in Miramar, Florida.
4) ValueClick, Inc. (VCLK)
|Industry||Internet Information Providers|
|Price/Cash Flow Ratio||13.97|
|Price/Earnings to Growth Ratio||0.82|
|Earnings Per Share Growth Rate||26.77%|
|Return on Assets||14.96%|
ValueClick, Inc. provides various products and services that enable marketers to advertise and sell their products through online marketing channels primarily in the United States and the United Kingdom. The company's Affiliate Marketing segment provides technology platforms, advertising network, and customer services, which enable advertisers to create their own commissioned online sales force comprising third-party Website publishers. This segment offers its services under the Commission Junction brand. Its Media segment provides digital marketing services and tailored programs under ValueClick Media brand name that enable marketers to create and increase awareness for their products and brands; attract visitors; and generate leads and sales through the Internet and mobile applications. The company's Owned & Operated Websites segment offers its services through various Websites comprising Pricerunner and Smarter.com Websites, which enable consumers to research and compare products from online and/or offline merchants; Couponmountain.com Website that enables consumers to locate coupons and deals related to products and services; and Investopedia.com Website, which provides information on various financial and investment topics, including a proprietary dictionary of financial terms. This segment also operates vertical content Websites that offer consumers information and reference material in various topics in healthcare, finance, travel, home and garden, education, and business services. Its Technology segment operates as an application service provider and offers technology infrastructure tools and consultative services that enable marketers to implement and manage their online display advertising, search engine marketing, and email campaigns. The company serves direct marketers, advertisers, advertising agencies, and traffic distribution partners. ValueClick, Inc. was founded in 1998 and is headquartered in Westlake Village, California.
5) Cooper Tire & Rubber Co. (CTB)
|Industry||Rubber & Plastics|
|Price/Cash Flow Ratio||5.15|
|Price/Earnings to Growth Ratio||0.55|
|Earnings Per Share Growth Rate||116.66%|
|Return on Assets||12.67%|
Cooper Tire & Rubber Company, together with its subsidiaries, manufactures and markets replacement tires in North America and internationally. It operates in two segments, North American Tire Operations and International Tire Operations. The North American Tire Operations segment produces and distributes passenger car and light truck tires, as well as tires for racing, medium trucks, and motorcycles to independent tire dealers, wholesale distributors, regional and national retail tire chains, and other large automotive product retail chains. This segment sells its products through three own retail stores. The International Tire Operations segment manufactures and markets passenger car, light truck, motorcycle, light vehicle tires, radial and bias medium truck tires, and racing tires and tire retread material to markets worldwide. The company was founded in 1913 and is based in Findlay, Ohio.
6) Denny's Corporation (DENN)
|Price/Cash Flow Ratio||21.82|
|Price/Earnings to Growth Ratio||0.22|
|Earnings Per Share Growth Rate||403.33%|
|Return on Assets||35.90%|
Denny's Corporation, through its subsidiaries, engages in the ownership and operation of a chain of family-style restaurants. The company operates traditional American-style food restaurants under the Denny's brand name. As of June 26, 2012, it operated 1,680 franchised, licensed, and company-owned restaurants in the United States, Canada, Costa Rica, Mexico, Honduras, Guam, Curacao, Puerto Rico, Dominican Republic, and New Zealand. The company was founded in 1980 and is headquartered in Spartanburg, South Carolina.
7) Generac Holdings Inc. (GNRC)
|Price/Cash Flow Ratio||146.88|
|Price/Earnings to Growth Ratio||0.35|
|Earnings Per Share Growth Rate||390.21%|
|Return on Assets||25.43%|
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. Its residential power products comprise automatic residential standby generators that range in output from 6kW to 60kW; air-cooled residential standby generators, which range in outputs from 6kW to 20kW; and liquid-cooled generators that range in outputs from 20kW to 60kW. The residential power product line also includes portable generators consisting of GP series ranging from 1,850W to 17,500W for homeowners; the XG series ranging from 4,000W to 10,000W for the premium homeowner market; the XP series ranging from 4,000W to 8,000W for the professional contractor market; and the iX series ranging from 800W to 2,000W for the recreational market. The company's industrial and commercial power products comprise light-commercial standby generators ranging from 22kW to 150kW for grocery stores, convenience stores, restaurants, gas stations, pharmacies, retail banks, and healthcare facilities; single-engine industrial generators, which range in output from 10kW to 600kW; and generator systems ranging from 20kW air-cooled generators to 3mW modular power system for the telecommunications market, as well as aftermarket service parts and RV generators. The company sells its generators through independent residential and industrial dealers, wholesalers, national accounts, private label arrangements, retailers, catalogs, e-commerce merchants, equipment rental companies and dealers, and construction companies. Generac Holdings Inc. was founded in 1959 and is headquartered in Waukesha, Wisconsin.
*Company profiles were sourced from Google Finance and Yahoo Finance. Financial data was sourced from Finviz on 08/27/2012.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.