Seeking Alpha

Small Cap Triple Threat Portfolio: Second Quarter Update

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Includes: ADWPF, CADNF, EHMEF, HDIUF, NOA, PBKOF, RAMPF, SCCAF, SISXF, TOTZF, WJXFF
by: Mat Litalien
Summary

Equal weighted and actively managed portfolio.

A focus on small cap stocks with decent volume and that pay a dividend.

Stocks are ranked according to income, growth and valuation metrics.

Portfolio has outperformed by a 2 to 1 ratio through the second quarter.

One of the aspects I appreciate about Seeking Alpha is the breadth of research available on lesser-known companies. Unfortunately, the coverage on Canadian-listed equities are focused on the larger companies, including the big banks, telecoms, utilities and miners.

However, there are interesting investing options for investors to consider outside of the big names. Over the past few months, I have developed a portfolio of stocks that might be of interest to those seeking something new.

Previously available only to marketplace subscribers, I’d like to introduce readers to the Small Cap Triple-Threat portfolio.

Typically, stocks fit into one of three categories – growth, income (dividend) and value. Why limit yourself to just one? When a stock provides income, growth and can be bought at a good value, I consider the stock to be a “Triple-Threat”.

Triple-Threat Methodology

First, let me explain the methodology behind the portfolio. For starters, the focus is on small caps which receive little exposure, and as such, aren’t well-known to retail investors. There is a limit however. The portfolio does not feature micro-caps or stocks that have little volume. Since the portfolio is focused on small caps, the expectation is for greater volatility.

As such, stocks with little volume were excluded as it is important to be able to exit a position quickly if things turn south. Lastly, since we are dealing with stocks that can fit into any category, they must pay a dividend.

The initial screen includes the following:

  • Market Cap >= $250 million and <= $1 billion
  • Volume => 10,000 daily volume
  • Dividend = Yes

From here, each of the stocks are ranked against criteria in each of the categories.

Here are the five criteria for Income:

  • Dividend Yield
  • Payout Ratio (as a % of earnings)
  • Payout Ratio (as a % of free cash flow)
  • Debt to Equity (as compared to industry averages)
  • Dividend Growth (# of consecutive years of dividend growth)

Here are the four criteria for Growth:

  • Historical Earnings Growth (# of consecutive years of earnings growth)
  • Historical Sales Growth (# of consecutive years of sales growth)
  • Future Earnings Growth (Average annual earnings expected growth rate)
  • Future Sales Growth (Average annual expected sales growth rate)

Here are the four criteria for Value:

  • Price-to-book (P/B) ratio
  • Forward price-to-earnings (P/E) ratio (against industry averages)
  • P/E to growth (PEG) ratio
  • Enterprise value (EV)-to-EBIDTA (EV/EBIDTA) ratio (against industry averages)

Armed with this wealth of information, only the best ranked across each category were included in the portfolio.

The inaugural, equal-weighted Small Cap Triple-Threat portfolio was as follows:

Ticker - TSX

Ticker

# Shares

ADW.A

(OTC:ADWPF)

74

CAS

(OTCPK:CADNF)

99

GSY

(OTCPK:EHMEF)

22

HDI

(OTC:HDIUF)

81

JWEL

N/A

56

NOA

(NOA)

67

PBL

(OTC:PBKOF)

42

PIF

(OTCPK:RAMPF)

86

SIS

(OTCPK:SISXF)

77

TOT

(OTC:TOTZF)

102

ZZZ

(OTC:SCCAF)

45

The initial yield of the portfolio was 2.22% and it had an average EPS growth rate of 20.89% over the next year.

Actively Managed Portfolio

Over the course of the year, this equally weighted portfolio is actively managed. The screen is run every two weeks and stocks are added or subtracted depending on their ranking. Likewise, each new stock will be added in $1,000 increments, much like the initial selection of stocks.

Since the initial list, two stocks have been added: Wajax (OTC:WJXFF)[TSX:WJX] and Timbercreek Financial [TSX:TF].

As of end of the second quarter, the portfolio is as follows:

Ticker

TSX

Avg

Cost

#

shares

Book

Value

Market

Price

Market

Value

ADW.A

$13.59

74

$ 1,005.66

13.75

$1,017.50

CAS

$10.09

99

$ 998.91

10.54

$1,043.46

GSY

$45.15

22

$ 993.30

53

$1,166.00

HDI

$12.35

81

$ 1,000.35

12.57

$1,018.17

JWEL

$17.79

56

$ 996.24

20.11

$1,126.16

NOA

$14.94

67

$ 1,000.98

14.11

$945.37

PBL

$24.00

42

$ 1,008.00

24.15

$1,014.30

PIF

$11.64

86

$ 1,001.04

14.72

$1,265.92

SIS

$12.99

77

$ 1,000.23

13.47

$1,037.19

TOT

$9.80

102

$ 999.60

8.26

$842.52

ZZZ

$22.20

45

$ 999.00

19

$855.00

WJX

$16.26

62

$ 1,008.12

15.73

$975.26

TF

$9.30

108

$ 1,004.40

9.49

$1,024.92

CASH

$128.25

TOTAL

$ 13,015.83

$13,460.2

The cash component is a collection of the dividends received since the portfolio’s inception. The current portfolio yields 2.93% and earnings are expected to grow by 18.93% on average next year.

Through the end of the second quarter, the portfolio is up 2.43% not including dividends and 3.41% once dividends are included.

Over the same period, the Small Cap Triple-Threat portfolio has handily outperformed the two benchmarks selected:

  • TSX Small Cap Index has posted a 2.29% loss.
  • iShares TSX Small Cap ETF has posted a 2.58% loss.

Stocks that missed the cut

There are interesting stocks that did not meet requirements for the Small Cap Triple-Threat portfolio. Some companies fit two of the three stock types, while others are strong in only one.

In between portfolio updates, readers will be introduced to some of these other companies who are attractive for their own unique reasons.

As always, investors should always do their own due diligence. This is especially true of small caps. As mentioned, they tend to be highly volatile and in certain cases, low volume can make entering and exiting a position difficult.

The portfolio above is not an endorsement to buy a particular stock. It is intended to expose Canadian investors to lesser-known and under-covered stocks by following a strict and easy to follow methodology.

If you have any questions, please feel free to post in the comments.

Disclosure: I am/we are long EHMEF. 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.