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ValuePickr Quality Small Cap Stocks Screener

Quality Small Cap Stocks. You might have wondered how one can research such stock ideas in India stock market? Check out how to shortlist quality small cap companies in the Indian stock market

QUALITY SMALL CAP STOCKS SCREENER

For some time now I have wanted to research this space extensively. 
This is the first time that we are coming close to be able to do that, on a regular basis, from now on. Voila! courtesy the ValuePickr stock screener.

In case you are not familiar with the term, you can find a brief on a stock screener and its capabilities in our Stock Screening Basics section.

Quality-small-cap-screener-criteria

Check out ValuePickr's Quality Small Cap screen selections for the Indian Stock Market, here.


DESIGNING THE QUALITY SMALL CAP STOCKS SCREEN

Setting the Universe

We wanted to shortlist stock ideas from the small cap stocks unioverse. So a criteria of annual sales between 100-500 Cr, for the current year, is used.

Secondary or Conditioning Criteria

We mentioned "Quality" small cap stocks, right. Which means we do not want the filter to pass companies with poor fundamentals. We want companies that have reported negative operating cashflows for last 2 years and have high debt-to-equity OUT. And we want IN, companies that report high Return-on-Equity and pay some dividends.

You could use probably a few more such fundamentals filters, but the above are deemed sufficient conditions.

Primary Criteria

Now this is where the objective of your screen gets defined. What kind of companies are we attempting to uncover? Small cap companies that are increasing earnings year over year for atleast the last 5 years. But thats not enough; we want only those that are available at attractive prices today. The PEG ratio is a good measure that compares the Price to Earnings ratio (NYSE:PE) to the earnings growth rate of the company. In order not to be misled by a year of growth spike, or some one-off extraordinary other income skewing earnings growth last year, we use the 5yr average earnings growth rate, for the comparison.

And that sets up our Quality Small Cap stock screener nicely! So enjoy the shortlist! Go ahead and dig into these companies. Let me know if you find Gold anywere!

When looking at the results, it is useful to keep in mind that there are no miracle screens that produce lists of guaranteed winners. A well-designed one however, would provide us with a shortlist of stocks that hold some promise.


Even the most well-designed screen is only a preliminary search!

Remember that even the best designed screen is only a preliminary search for investments using a small set of quantitative factors. A complete in-depth analysis of shortlisted stocks that explores both quantitative and qualitative factors should follow any screen.

If you want to follow any of the shortlisted stock ideas, the best place to start is the companies website; start by digging at the Annual Report (usually found in the Investor section); look at analyst presentations if available, press releases and also search for more information on the company, recent newsflow, etc. Find out all you can about the company and its competitive environment. 

Disclosure: This article is neither an offer to sell nor solicitation to buy any of the securities mentioned herein. The author, a Director at ValuePickr Investments, frequently invests in the shares discussed by him.