What are we looking for?
U.S.-listed small-capitalization stocks that look poised to outperform.
Market watchers are often interested in comparing the performance of large-cap stocks with small- and intermediate-cap stocks to gauge relative performance. One means of doing this is to look at the ratio of the S&P 100 index (a large-cap stock index) to the S&P 600 index (a small-cap index of companies with market capitalizations between about $500-million [U.S.] and $1.6-billion).
In 2014, large caps outperformed small caps by a wide margin. The S&P 100/S&P 600 ratio grew from 1.21 at the start of the year to almost 1.4 by year-end. So far in 2015, the story is reversed. Small caps have dominated their large-cap counterparts and the ratio has fallen back to about 1.29. If this trend continues, we should see continued outperformance of small-cap U.S. stocks in 2015.
The screen
We will be using Recognia Strategy Builder to search for U.S.-listed small-cap stocks that are poised to outperform.
We will screen for small-cap U.S. stocks with a market cap of between $500-million and $1.6-billion. Next, we will filter based on 13-week price performance. To identify winners, we will consider only stocks that have already moved up by 15 per cent or more in the past quarter. And we will consider only stocks rated "buy" or "strong buy" by a consensus of analysts.
Last, to ensure we select companies that are both well valued and poised to grow, we will screen for stocks with analyst estimated earnings growth rates of at least 30 per cent this year over last year, and we will include only companies with trailing price-to-earnings ratios of 20 or less.
More about Recognia
Recognia is a global leader in automated quantitative analysis and engagement solutions for retail online brokers and institutions.
What did we find?
Net 1 UEPS is a South African provider of electronic payment and transaction processing solutions. It has the lowest P/E ratio on our list at just 7.1 and an estimated EPS growth rate of 182 per cent. On Feb. 2, the company announced second-quarter results that beat analyst expectations on earnings but missed slightly on revenue.
1-800-Flowers.com has the strongest 13-week price performance of any company on our list with a stock-price gain of almost 75 per cent in the past quarter. The stock is now at a seven-year high driven by improved ordering and cost cutting initiatives as well as optimism about its recent acquisition of Harry & David's. In spite of recent price gains, the stock still has a P/E of just less than 20.
Executive recruitment firm Korn/Ferry International is the largest company on our list with a market cap just shy of $1.6-billion. Strong employment growth in the United States has pushed its stock price up by almost 19 per cent in the past 13 weeks and analysts expect a 70-per-cent earnings-per-share growth rate this year. On March 9, the company issued third-quarter results which met earnings expectations but missed slightly on revenue.
The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Recognia Inc. in respect of the investment in financial instruments. Investors should conduct further research before investing.
Peter Ashton is vice-president of retail and self-directed investing at Recognia Inc.