Seeking Alpha
Recommended for you:
, Portfolio123 (1,639 clicks)
Long only, value, research analyst, dividend investing
Profile| Send Message|
( followers)  

Fast-growing small cap companies that are debt free and rich in cash have a better chance of providing superior returns.

I have created a screening method that shows stock candidates following these lines. Nonetheless, the screening method should only serve as a basis for further research.

The screen's formula requires all stocks to comply with all following criteria:

1. The stock is included in the S&P 600 index. S&P Custom Indices Fact Sheet explanation:

Introduced in 1994, the S&P SmallCap 600® is fast becoming the preferred small cap index in the U.S., covering approximately 3% of the domestic equities market. Measuring a segment of the market that is typically renowned for poor trading liquidity and financial instability, the index is designed to be an efficient portfolio of companies that meet specific inclusion criteria to ensure that they are investable and financially viable.

2. Earnings growth estimates for the next five years (per annum) is greater than 16%.

3. The PEG ratio is less than 1.0.

4. Total debt to equity is zero.

5. The price to cash ratio is less than 6.0.

After running this screen on October 26, 2012, before the market open, I obtained as results the five following stocks:

(click images to enlarge)

American Public Education, Inc. (NASDAQ:APEI)

American Public Education provides online post-secondary education focusing on the needs of the military and public service communities.

American Public Education has a low trailing P/E of 14.91 and a low forward P/E of 12.95. The PEG ratio is also very low at 0.90. The average annual earnings growth for the past five years has been very high at 61.65%, and the average annual earnings growth estimate for the next five years is quite high at 16.55%. The total cash of the company is $117 million, which is equal to about 19% of its market cap, and there have been net insider purchases during the last six months of 159,918 shares. The company is trading 26.4% below its 52-week high, and has 17.3% upside potential based on the consensus mean target price of $40.56. All these factors should push the stock higher.


Hot Topic Inc. (NASDAQ:HOTT)

Hot Topic operates as a mall and web-based specialty retailer in the United States.

Hot Topic has a forward P/E of 17.24 and a low PEG ratio of 0.99. The average annual earnings growth estimate for the next five years is very high at 22.67%. The total cash of the company is $64 million, which is equal to about 18% of its market cap, and there have been net insider purchases during the last six months of 51,533 shares. The company is trading 18.1% below its 52-week high, and has 43.9% upside potential based on the consensus mean target price of $12.40. All these factors make the stock quite attractive.

Insperity, Inc. (NYSE:NSP)

Insperity, Inc. provides an array of human resources and business solutions to help enhance business performance for small and medium-sized businesses.

Insperity has a very low forward P/E of 13.94 and a very low PEG ratio of 0.86. The average annual earnings growth estimate for the next five years is very high at 22.67%. The total cash of the company is $238 million, which is equal to about 36% of its market cap. The company is trading 17.4% below its 52-week high, and has 35% upside potential based on the consensus mean target price of $34.80. NSP is scheduled to report its third-quarter 2012 financial results on October 31, and the results will probably affect the short-term stock price.

Netgear Inc. (NASDAQ:NTGR)

Netgear Inc. engages in the design, development, marketing, and sale of networking products.

Netgear Inc. has a low trailing P/E of 14.28 and a very low forward P/E of 12.11. The PEG ratio is also very low at 0.71. The average annual earnings growth for the past five years has been quite high at 15.14%, and the average annual earnings growth estimate for the next five years is very high at 20%. The total cash of the company is $360 million, which is equal to about 27% of its market cap. The company is trading 17.5% below its 52-week high, and has 14.8% upside potential based on the consensus mean target price of $41.13. On October 25, 2012, the company reported Q3 results, on that occasion, the company said that despite the difficult market situation, it continues to innovate and expects to release approximately 25 new products in Q4, setting it up for growth in 2013. NTGR stock looks quite attractive.

Virtusa Corp. (NASDAQ:VRTU)

Virtusa Corporation provides information technology consulting, technology implementation, and application outsourcing services in North America, Europe, the Middle East, and Asia.

Virtusa has a very low forward P/E of 12.89 and a very low PEG ratio of 0.80. The average annual earnings growth for the past five years has been quite high at 17.23%, and the average annual earnings growth estimate for the next five years is very high at 24.20%. The total cash of the company is $73.4 million, which is equal to about 17% of its market cap. Among the eight analysts covering the stock, five rate it a strong buy, two rate it a buy, and only one rates it a hold. The company is trading 9.3% below its 52-week high, and has 16.5% upside potential based on the consensus mean target price of $19.67. VRTU is scheduled to report its second-quarter 2013 financial results on October 29, and the results will probably affect the short-term stock price.

Charts courtesy of finviz.com.

Source: 5 Cash-Rich Small Cap Growth Stocks With Zero Debt