Small-cap stocks tend to offer investors greater growth potential than larger cap alternatives, although this comes with added risk. To minimize that risk, today we searched for companies with strong asset liquidity, meaning that they are prepared for the worse if needed, or they have the ability to fund strategic acquisitions or growth investments. As a way to hone in on companies that are currently on sale, we only looked for stocks whose fundamentals suggest that they are trading below their true value. Our screen came up with a short but interesting list.
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).
The Price/Book Value Ratio is a great price-multiple valuation metric to find companies that could be potentially undervalued or overvalued. If a firm has a Price/Book Value Ratio of less than 1 it is stated to be trading below "break up" value. A lower P/BV Ratio can indicate a potentially mispriced company or indicate that something is fundamentally wrong with it.
The Price/Earnings ratio is one of the most commonly used price-multiple metrics. Often, EPS from the last four quarters is used to derive this number. A firm that has a high P/E ratio generally indicates that investors have high expectations of the firm relative to future earnings growth. By the opposite token, investors generally have lower expectations of a firm with a low P/E ratio. A firm that holds a P/E below 10 could be viewed as having "value investment" potential. One thing to remember is that EPS is an accounting measure that could be potentially manipulated. Thus the P/E is only as good as the quality of the earnings.
We first looked for small cap stocks. We then screened for businesses with a large amount of cash on hand (Current Ratio>2)(Quick Ratio>2). From here, we then looked for companies that are undervalued (P/BV<1)(P/E<10). We did not screen out any sectors.
Do you think these small-cap stocks have more value to price in? Use our list along with your own analysis.
1) Grupo Simec S.A.B. de C.V. (NYSEMKT:SIM)
|Industry:||Steel & Iron|
Grupo Simec S.A.B. de C.V. has a Current Ratio of 4.32, a Quick Ratio of 2.88, a Price/Book Value Ratio of 1.00, and a Price/Earnings Ratio of 7.02. The short interest was 0.94% as of 06/21/2012. Grupo Simec, S.A.B. de C.V. engages in the manufacture, processing, and distribution of special bar quality (SBQ) and structural steel products primarily in the United States, Mexico, and Canada. Its steel products include I-beams, channels, structural and commercial angles, flat bars, rebars, cold finished bars, wire rods, semi-finished tube rounds, and other semi-finished trade products, as well as hot rolled bars, which comprise round, square, and hexagonal rods. The company's SBQ products are used in various engineered end-user applications, including axles, hubs, and crankshafts for automobiles and light trucks, machine tools, and off-highway equipment.
2) Precision Drilling Corporation (NYSE:PDS)
|Industry:||Oil & Gas Equipment & Services|
Precision Drilling Corporation has a Current Ratio of 2.42, a Quick Ratio of 2.40, a Price/Book Value Ratio of 0.88, and a Price/Earnings Ratio of 8.51. The short interest was 0.53% as of 06/21/2012. Precision Drilling Corporation provides contract drilling, and completion and production services to oil and natural gas exploration and production companies. Its Contract Drilling Services segment offers land drilling, directional drilling, and turnkey drilling services; trucking services for the movement of precision rigs; and procures and distributes oilfield supplies, as well as manufactures and refurbishes drilling and service rig equipments. As of December 31, 2011, this segment operated 188 land drilling rigs in Canada, 143 land drilling rigs in the United States, 3 land drilling rigs in Saudi Arabia, 2 land drilling rigs in Mexico, and 1 land drilling rig in Colombia.
3) Superior Industries International, Inc. (NYSE:SUP)
Superior Industries International, Inc. has a Current Ratio of 5.71, a Quick Ratio of 4.76, a Price/Book Value Ratio of 0.99, and a Price/Earnings Ratio of 7.06. The short interest was 4.48% as of 06/21/2012. Superior Industries International, Inc. engages in the design, manufacture, and sale of aluminum road wheels to original equipment manufacturers primarily in North America. It supplies cast aluminum wheels to automobile and light truck manufacturers. The company was founded in 1957 and is headquartered in Van Nuys, California.
*Company profiles were sourced from Finviz. Financial data was sourced from Yahoo Finance.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.