I have searched for small-cap growth stocks that pay rich dividends and that are technically oversold at the moment. Those stocks have a better than average chance of beating the market.
I have elaborated a screening method, which 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 demands:
1. The stock is included in the Russell 2000 index. Russell Investment explanation:
The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. The Russell 2000 is a subset of the Russell 3000® Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership. The Russell 2000 Index is constructed to provide a comprehensive and unbiased small-cap barometer and is completely reconstituted annually to ensure larger stocks do not distort the performance and characteristics of the true small-cap opportunity set.
2. Earnings growth estimates for the next 5 years (per annum) is greater than 11%.
3. Long term debt to equity is less than 0.8.
4. The forward P/E is less than 15.
5. The PEG ratio is less than 1.40.
6. Dividend yield is greater than 1.60%.
7. RSI (14 days) is above 30 and RSI (14 days) was below 30 in one of the last 3 days. (The Relative Strength Index (RSI) is an oscillator that measures current price strength in relation to previous prices. The classic way to interpret RSI is to look for oversold levels below 30 and overbought levels above 70. When the RSI crosses above the oversold line (30) it is considered buy signal).
I used Portfolio123's powerful free screener to perform the search. After running this screen on November 01, 2012, before the market open, I obtained as results the 5 following stocks:
Applied Industrial Technologies, Inc. (NYSE:AIT)
Applied Industrial Technologies, Inc. distributes industrial products for maintenance, repair, and operational needs.
Applied Industrial Technologies has no debt at all and it has a very low forward P/E of 12.45 and a low PEG ratio of 1.13. The price to sales is very low at 0.71 and the average annual earnings growth estimates for the next 5 years is 13.7%. The forward annual dividend yield is 2.07% and the payout ratio is 0.32. On October 23, Applied Industrial reported its fiscal 1Q 2013 results. The company reiterated its prediction for 2013 earnings per share of $2.90 to $3.05, but cut its expected revenue growth to 6 percent to 10 percent. In August it said it expected revenue to grow 9 percent to 13 percent. Although the company cut its expected revenue growth by an average of 3 percent I still think that AIT stock is quite attractive.
Einstein Noah Restaurant Group, Inc. (NASDAQ:BAGL)
Einstein Noah Restaurant Group, Inc. owns, operates, franchises, and licenses bagel specialty restaurants in the United States.
Einstein Noah Restaurant has a low forward P/E of 13.65 and a low PEG ratio of 1.06. The average annual earnings growth estimates for the next 5 years is quite high at 16.5%. The price to free cash flow for the trailing 12 months is quite low at 14.18 and the price to sales is very low at 0.61. The forward annual dividend yield is very high at 3.24% and the payout ratio is 0.57. The company is trading 17% below its 52-week high, and has 30% upside potential based on the consensus mean target price of $20. BAGL is scheduled to report its third-quarter 2012 financial results on November 08, and the results will probably affect the short-term stock price.
CTS Corporation (NYSE:CTS)
CTS Corporation engages in the design, manufacture, assembly, and sale of electronic components and sensors, as well as the provision of electronics manufacturing services worldwide.
CTS Corporation has a low debt (total debt to equity is only 0.35) and it has a very low forward P/E of 9.41 and a very low PEG ratio of 0.99. The price to sales is very low at 0.48 and the average annual earnings growth estimates for the next 5 years is quite high at 16.7%. The forward annual dividend yield is 1.69% and the payout ratio is only 0.28. The company is trading 25.7% below its 52-week high, and has 93% upside potential based on the consensus mean target price of $16. Analysts like the stock; among the three analysts covering the stock, two rate it a strong buy and one rates it a buy. The CTS stock seems to be a good investment right now.
Electro Rent Corporation (NASDAQ:ELRC)
Electro Rent Corporation engages in the rental, lease, and sale of new and used electronic test and measurement equipment primarily for use in the aerospace, defense, telecommunications, electronics, industrial, and semiconductor markets in the United States and internationally.
Electro Rent has no debt at all and it has a low forward P/E of 14.16 and a very low PEG ratio of 1.14. The average annual earnings growth estimates for the next 5 years is quite high at 15%. The forward annual dividend yield is very high at 5.09% and the payout ratio is only 0.87. The company is trading 16.8% below its 52-week high, and has 40% upside potential based on the consensus mean target price of $22. Only one analyst is covering the stock and he rates it a strong buy. The ELRC stock looks quite attractive.
Kaydon Corporation (NYSE:KDN)
Kaydon Corporation engages in the design, manufacture, and sale of custom engineered, performance-critical products in the United States, Germany, and internationally.
Kaydon has a low debt (total debt to equity is 0.55) and it has a low forward P/E of 13 and a low PEG ratio of 1.31. The average annual earnings growth estimates for the next 5 years is 11.78%. The forward annual dividend yield is very high at 3.58% and the payout ratio is 0.55. The company is trading 41.5% below its 52-week high, and has 24% upside potential based on the consensus mean target price of $27.67. On October 26, the company reported its 3Q results, the company said that non-wind incoming orders during the quarter were healthy as many of its traditional markets, including military, heavy equipment and medical, experienced gains. With a non-wind book to bill of 102 percent, the company saw the third consecutive quarter of non-wind orders exceeding shipments. I think KDN stock is oversold and it is ready to move higher.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in CTS over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.