We have identified 17 small cap stocks in the S&P 600 Small Cap index that have met stringent financial criteria
MarketWatch | December 5, 2016: Do you think it’s too late to invest in small cap stocks, which have rallied 12% in the three weeks since Donald Trump won the presidential election?
We have identified 17 companies in the S&P 600 Small Cap index that have met stringent financial criteria and are trading at price-to-earnings values that are lower than that of the index.
The index traded for 19.8 times weighted consensus 2017 earnings estimates, among analysts polled by FactSet, as of the close on Nov. 28. That was up from 17.5 a year earlier. In fact, the index hasn’t traded so high relative to the following year’s earnings estimates since 2002.
That is why jumping into a small-cap index fund, such as the SPDR S&P 600 Small-Cap ETF might be a rather risky choice for you today.
Screening small-cap stocks for ‘quality’
Starting with the S&P 600, we limited the group to stocks meeting these criteria:
- Increased sales per share over the past 12 months. The per-share numbers reflect any dilution from the issuance of shares (to pay for acquisitions, for example), as well as any decline in the share count from buybacks.
- Improved quarterly gross margin from a year earlier. The gross margin is a company’s sales, less its cost for goods sold, divided by sales.
- Improved gross margin for the past 12 months from the previous 12-month period.
- Positive net income margins this quarter and a year earlier, with the margin improving from a year earlier.
- Positive net income margin over the past 12 months and previous 12-month period, with the margin improving.
The idea is to isolate companies that are increasing sales, while improving their pricing margins and overall efficiency.
A total of 41 companies met all the criteria. Consensus price-to-earnings ratios are available for 40 of the companies, and only 17 trade at forward price-to-earnings multiples below the index’s forward P/E of 19.8:
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