Tiny Titans Strategy

Apr. 13, 2022 6:13 PM ETAINC, ALJJ, AMPY, ARC, DLHC, EXTN, HHS, HNRG, HSON, JAKK, JILL, MMLP, MTEX, NCSM, NSYS, PANL, PPIH, QRHC, RCMT, RELL, RNGR, SVT, SYNL, TWIN, VOLT3 Comments6 Likes
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Summary

  • For the investor with patience and the ability to withstand the higher short-term volatility and risk of micro-cap stocks, there is the potential for strong long-term returns.
  • AAII’s version of O’Shaughnessy’s Tiny Titans stock screen consists of very few criteria.
  • Top 25 stocks passing the O’Shaughnessy Tiny Titans screen.

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This week, we cover the O’Shaughnessy Tiny Titans stock-picking strategy and give you a list of stocks that currently pass our screen based on the approach. The O’Shaughnessy Tiny Titans strategy focuses on micro-cap stocks that meet criteria for value, size and momentum factors. Small-cap stocks normally do well during economic recoveries.

For the investor with patience and the ability to withstand the higher short-term volatility and risk of micro-cap stocks, there is the potential for strong long-term returns. As of March 31, AAII’s O’Shaughnessy Tiny Titans screening model has an annual gain since inception (1998) of 24.6%, versus 8.7% for the S&P SmallCap 600 index over the same period.

Investing in Micro-Cap Companies Using the O’Shaughnessy Tiny Titans Screen

AAII tracks several screens from James O’Shaughnessy, the founder and chair of O’Shaughnessy Asset Management LLC, an asset management firm headquartered in Stamford, Connecticut. The O’Shaughnessy screens that AAII has developed are based on the strategies outlined in his books “What Works on Wall Street: A Guide to the Best-Performing Investment Strategies of All Time,” (4th Edition, 2011, McGraw-Hill) and “Predicting the Markets of Tomorrow: A Contrarian Investment Strategy for the Next Twenty Years,” (2006, Penguin Group). It is from the latter book that the concept of the Tiny Titans approach was derived.

The Tiny Titans approach focuses on micro-cap stocks. Much research has been done regarding the success of investing in this market-capitalization category. AAII’s Model Shadow Stock Portfolio is based on a study that showed that small- and micro-cap stocks tend to outperform the overall market over long periods.

O’Shaughnessy believes the reason for this outperformance is that few analysts follow these small stocks. Also, many institutional investors and mutual funds cannot trade these stocks without moving the price due to the relatively small number of outstanding shares. This leaves room for surprises, which can lead to a performance “pop.” O’Shaughnessy also says that micro-cap stocks have a low correlation with the overall stock market, making them a potential hedge in a portfolio of larger-cap stocks.

Low Price-to-Sales Ratio & Strong Price Strength Relative to the Market

AAII’s version of O’Shaughnessy’s Tiny Titans stock screen consists of very few criteria. First, all foreign stocks and over-the-counter (OTC) stocks are eliminated. Next, a stock’s market cap must be between $25 million and $250 million.

After filtering out the larger-cap stocks, the Tiny Titans screen looks for stocks with price-to-sales ratios of less than 1.0. The price-to-sales ratio compares the current stock price to the sales of a company. O’Shaughnessy uses this as a proxy for “cheapness,” as opposed to a price-earnings ratio. He reasons that all viable companies have sales, and sales are harder to manipulate than earnings. In the third edition of his book “What Works on Wall Street,” O’Shaughnessy found that stocks with low price-to-sales ratios produced higher returns.

Finally, O’Shaughnessy thinks investors should hold 25 stocks in this micro-cap portfolio to diversify the risk that goes along with holding such volatile stocks. He narrowed the list to the 25 stocks with the highest 52-week relative strength as compared to the S&P 500 index. So, monthly, AAII tracks only those 25 companies with the highest 52-week relative strength. As of the end of April 12, 2022, the top 25 companies passing the O’Shaughnessy Tiny Titans strategy ranked in the top 90% of all stocks regarding 52-week relative price strength.

For a stock investment strategy to be useful, it must be investable. That means a quantitative approach needs to generate a large enough universe of passing companies on which to perform additional due diligence to identify investment candidates. Since the O’Shaughnessy Tiny Titans screen looks for the 25 companies with the highest price strength over the last year after applying the market-cap and value filters, there are always companies passing. Keep in mind, however, that there may be periods when the companies with the “best” price strength may still be down over the last 52 weeks. The Tiny Titans methodology looks for those companies with the strongest price performance, but not necessarily a positive price change.

Top 25 Stocks Passing the O’Shaughnessy Tiny Titans Screen (Ranked by 52-Week Relative Strength)

stocks passing the AAII O

American Association of Individual Investors

Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.

This article was written by

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Charles Rotblut, CFA is the editor of the AAII Journal, the flagship publication of The American Association of Individual Investors (AAII). Charles provides both insight about individual investor sentiment and market analysis. He is also the author of "Better Good than Lucky: How Savvy Investors Create Fortune with the Risk-Reward Ratio" (W&A Publishing/Trader's Press).
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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The stocks meeting the criteria of the approach do not represent a “recommended” or “buy” list. It is important to perform due diligence.

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