Small-cap stocks tend to offer investors greater growth opportunities than large-cap alternatives, although this comes with its fair share of added risk. One tactic to minimize that risk is to screen on company liquidity. Liquidity gives a company the ability to make big acquisitions if it sees investment opportunities, a cushion for future lulls in demand, and most importantly, it keeps a company's doors open. Today we focused on technology companies with great liquidity, while focusing in on those that also look undervalued according to their fundamentals. We came up with a short but interesting list.
The forward P/E is a price multiple valuation metric, which is similar to the current P/E ratio, except that it uses the earnings forecast instead. While this number might not be as accurate because it uses the "forecast" numbers, it does offer the benefit of illustrating analysts' expectations of a firm. If the market believes that earnings will grow moving forward, then the forward P/E should be lower than the current P/E. Financial Leverage, also known as the Equity Multiplier, illustrates how a firm is financing its assets. The lower the number the more a firm is financing its assets internally through stockholder equity. The higher this metric is the more the firm is relying on debt to finance its assets.
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.
The Current ratio is a liquidity ratio used to determine a company's financial health. The metric illustrates how easily a firm can pay back its short obligations all at once through current assets. A company that has a current ratio of one or less is generally a liquidity red flag. Now this doesn't mean the company will go bankrupt tomorrow, but it also doesn't bode well for the company, and may indicate that it could have an issue paying back upcoming obligations.
The Quick ratio measures a company's ability to use its cash or assets to extinguish its current liabilities immediately. Quick assets include assets that presumably can be converted to cash at close to their book values. A company with a Quick Ratio of less than 1 cannot currently pay back its current liabilities. The Quick Ratio is more conservative than the Current Ratio because it excludes inventory from current assets, since some companies have difficulty turning their inventory into cash. If short-term obligations need to be paid off immediately, sometimes the current ratio would overestimate a company's short-term financial strength. In general, the higher the ratio, the greater the company's liquidity (i.e., the better able to meet current obligations using liquid assets).
We first looked for small-cap technology stocks. Next, we screened for businesses with a low price-multiple premium (forward P/E<10)(PEG Ratio < 1). We then looked for businesses with a large amount of cash on hand (Current Ratio>2)(Quick Ratio>2).
Do you think these small-cap stocks will trade at a higher valuation? Use this list as a starting-off point for your own analysis.
1) Netgear Inc. (NASDAQ:NTGR)
Netgear Inc. has a Forward Price/Earnings Ratio of 9.98, a Price/Earnings to Growth Ratio of 0.84, a Current Ratio of 3.30, and a Quick Ratio of 2.75. The short interest was 11.03% as of 06/20/2012. Netgear engages in the design, development, marketing, and sale of networking products. The company offers home networking, storage, and digital media products to connect users with the Internet and their content and devices; networking, storage, and security solutions to commercial businesses; and whole home networking solutions to service providers for sale to their customers. Its products include commercial business networking products consisting of Ethernet switches, wireless controllers, Internet security appliances, and network attached storage devices; broadband access products, such as routers, gateways, IP telephony products, and media servers; and network connectivity products comprising wireless access points, wireless network interface cards and adapters, Ethernet network interface cards and adapters, media adapters, powerline adapters and bridges, and multimedia over coax alliance standard adapters and bridges.
2) Power-One Inc. (NASDAQ:PWER)
Power-One Inc. has a Forward Price/Earnings Ratio of 8.44, a Price/Earnings to Growth Ratio of 0.66, a Current Ratio of 2.84, and a Quick Ratio of 2.11. The short interest was 5.45% as of 06/20/2012. Power-One engages in the design, manufacture, sale and service of power supply products for the renewable energy (RE), servers, storage and networking, telecommunications, industrials, and network power systems industries worldwide. Its products convert, regulate, purify, store, manage, or distribute electrical power for electronic equipment. The company provides RE inverters, which convert solar or wind energy into useable grid connected power for use in residential and commercial, and utility-grade solar panels, as well as wind turbine farms; and alternate current (AC)/direct current (DC) power supplies that convert AC into DC voltage used primarily in networking systems, network servers and storage, and industrial equipment.
3) Kulicke & Soffa Industries Inc. (NASDAQ:KLIC)
|Industry:||Semiconductor Equipment & Materials|
Kulicke & Soffa Industries Inc. has a Forward Price/Earnings Ratio of 6.86, a Price/Earnings to Growth Ratio of 0.54, a Current Ratio of 3.14, and a Quick Ratio of 2.84. The short interest was 4.21% as of 06/20/2012. Kulicke and Soffa Industries designs, manufactures, and sells capital equipment and expendable tools to assemble semiconductor devices, including integrated circuits, powered discrete devices, light-emitting diodes, and power modules. It also services, maintains, repairs, and upgrades its equipment. The company operates in two segments, Equipment and Expendable Tools.
4) OmniVision Technologies Inc. (NASDAQ:OVTI)
|Industry:||Semiconductor - Integrated Circuits|
OmniVision Technologies Inc. has a Forward Price/Earnings Ratio of 9.97, a Price/Earnings to Growth Ratio of 0.91, a Current Ratio of 3.55, and a Quick Ratio of 2.15. The short interest was 17.28% as of 06/20/2012. OmniVision Technologies engages in designing, developing and marketing semiconductor image-sensor devices worldwide. The company primarily offers CameraChip image sensors, which are single-chip solutions that integrate various functions, such as image capture, image processing, color processing, signal conversion, and output of a processed image or video stream for use in various consumer and commercial mass-market applications; and CameraCube imaging devices that are image sensors with integrated wafer-level optics. It also provides companion chips used to connect its image sensors to various interfaces, including the universal serial bus and other industry standard interfaces; and companion digital signal processors that perform compression in standardized still photo and digital video formats.
*Company profiles were sourced from Finviz. Financial data was sourced from Finviz and Google Finance.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.