Compose your own small-cap value portfolio with a stock screener
People - Investing
Thursday, 08 November 2007 15:49

In my previous article I showed how to compose a small value portfolio by picking the best buys from the ten biggest holdings of each of the funds RZV, IJS, VBR, JKL, EES, IWN and DES. In this article I will discuss a different way to select small-cap value companies: using Yahoo's Stock Screener. With this stock screener I have selected the companies in the table below. The criteria for selection are based on market cap, P/E and Enterprise Value/Revenue. The Enterprise value is the market cap minus short term liquid assets such as cash plus debts.

Small Value Selection November 7, 2007
Enterprise Value/Revenue (ttm) >0 and <0.80 Market Cap >100m and <2b P/E <10 Forward P/E <15
Ticker Company Name Last Trade Trade Time Mkt Cap Return On Equity Return On Assets P/E Enterprise Value / Revenue(ttm) Forward PE
WCC WESCO INTL INC 45.01 4:02pm 1.994B 37.608 10.234 9.558 0.47 8.59
ALJ ALON USA ENERGY 36.94 4:02pm 1.729B 49.418 18.669 9.144 0.5 9.85
PNX THE PHOENIX CO IN 11.88 4:08pm 1.357B 7.253 0.651 8.36 0.65 10.97
SIGI SELECTIVE INS GP 22.55 4:00pm 1.206B 0 0 8.519 0.76 10.16
YRCW YRC WORLDWIDE 20.81 4:00pm 1.189B 0 0 8.371 0.27 8.48
DK DELEK US HOLDINGS 22.45 4:04pm 1.152B 31.362 12.673 9.288 0.35 10.91
PSS COLLECTIVE BRANDS 17.14 4:01pm 1.123B 16.364 7.388 9.662 0.34 9.2
KFS KINGSWAY FINANCIA 19.93 4:00pm 1.109B 12.428 2.253 9.736 0.57 8.68
USU USEC INC 9.33 4:01pm 1.030B 7.757 3.086 7.341 0.58 12.71
ALK ALASKA AIR GROUP 22.6 4:03pm 914.8M 11.044 2.848 8.37 0.36 6.9
BRKS BROOKS AUTOMATION 12.07 4:00pm 849.5M 8.013 4.154 5.376 0.61 13.47
DBRN DRESS BARN THE 13.97 4:00pm 839.3M 22.031 10.737 9.668 0.53 9.12
HMN HORACE MANN EDUCA 19 4:05pm 822.6M 15.85 1.488 8.971 0.45 8.79
CBRL CBRL GROUP INC 34.41 4:00pm 816.4M 37.393 7.134 6.581 0.69 10.71
CHRS CHARMING SHOPPES 6.49 4:00pm 795.4M 9.614 4.988 9.643 0.26 10.74
JAKK JAKKS PACIFIC INC 24.53 4:00pm 692.6M 12.698 6.753 9.899 0.75 9.63
GPI GROUP 1 AUTOMOTIV 27.8 4:04pm 668.3M 11.318 5.746 8.607 0.3 7.55
SAFT SAFETY INS GRP IN 36.38 4:00pm 590.6M 20.624 6.645 5.868 0.7 7.18
CAS CASTLE A M AND CO 25.1 4:01pm 554.6M 18.335 8.518 9.62 0.51 9.48
NTE NAM TAI ELECTRONI 12.35 4:00pm 553.3M 17.528 5.14 9.581 0.36 12.62
SPSX SUPERIOR ESSEX IN 25.44 4:00pm 521.6M 13.005 6.855 9.305 0.28 8.41
SMOD SMART MODULAR TEC 8.15 4:01pm 493.0M 30.833 10.208 9.293 0.56 9.01
SFN SPHERION CORP 7.51 4:00pm 420.3M 6.436 3.915 7.734 0.21 12.25
OXM OXFORD INDS 23.19 4:01pm 414.9M 10.616 6.241 9.041 0.58 8.31
ARII AMERICAN RAILCAR 19.23 4:00pm 409.6M 16.375 7.494 9.851 0.53 8.76
EMCI EMC INSURANCE GP 24.76 4:00pm 340.8M 16.738 3.868 6.652 0.74 12.77
CHIC CHARLOTTE RUSSE H 12.86 4:00pm 326.0M 19.273 10.346 6.273 0.36 9.05
AMSF AMERISAFE INC 14.78 4:00pm 277.9M 22.89 3.954 7.072 0.8 7.54
BONT BON TON STORES TH 15.35 4:00pm 264.1M 11.697 5.491 7.8 0.42 5.36
SMRT STEIN MART INC 5.57 4:00pm 236.8M 11.376 6.804 7.683 0.17 8.71
GEHL GEHL COMPANY 18.2 4:00pm 222.9M 10.489 6.422 9.234 0.57 10.06
NYM NYMAGIC INC 24.96 4:03pm 222.5M 12.462 3.081 6.818 0.65 8.61
MTEX MANNATECH INC 7.26 4:00pm 192.1M 30.845 14.925 7.462 0.37 4.88
RSC REX STORES CP 17.58 4:00pm 183.1M 7.405 0.602 9.498 0.37 13.07
SCVL SHOE CARNIVAL INC 13.51 4:00pm 171.1M 10.656 6.584 8.83 0.24 8.36
CLDN CELADON GROUP INC 7.07 4:00pm 168.0M 12.545 8.626 9.516 0.52 9.57
SAIA SAIA INC 12.25 4:00pm 163.7M 10.708 5.781 8.156 0.34 8.61
MGPI MGP INGREDIENTS 8.87 4:00pm 150.1M 12.505 7.916 8.48 0.47 9.26
ISH INTL SHIPHOLDING 21.89 4:00pm 142.7M 0 0 5.606 0.75 13.7
GVHR GEVITY HR INC 5.82 4:00pm 135.8M 18.862 6.31 5.444 0.28 7.19

You might want to reduce the amount of stocks in this list. A smaller list saves you time and transaction costs. There are several ways to pick stocks from this list. First you might want to exclude some of these companies based on for instance ethics (MTEX?) or pollution caused. Then you could select the stocks with lower forward P/E than the current P/E. This means that if the price of the companies shares stays the same the profits will go up. If the earnings indeed increase, that is if the earnings forecast turns into reality, then the price will usually follow. In that case you end up with the stocks SCVL, MTEX, BONT, CHIC, ARII, OXM, SMOD, SPSX, CAS, GPI, JAKK, HMN, DBRN, ALK, KFS, PSS and WCC. You could limit this new list by picking the ten stocks that have the lowest P/E or by picking the ten stocks with the biggest difference between actual P/E and forward P/E.

Another way of limiting the list is just choosing the ten companies with the lowest P/E. These are the tickers BRKS, GVHR, ISH, SAFT, CHIC, CBRL, EMCI, NYM, USU, SFN. Alternatively you could select the ten stocks with the lowest ratio Enterprise Value/Revenue: SMRT, SFN, SCVL, CHRS, YRCW, SPSX, GVHR, GPI, PSS, and SAIA. Or you could also include a dividend criterium in the stock screener. If I demand at least one percent dividend in combination with a lower forward P/E than the current P/E then I get this list: KFS, HMN, GPI, OXM, BONT and MTEX.

As you can see there are many ways in which a small-cap value portfolio can be composed. To be a good investor it is important that you stay consequent. That is once you have choosen your criteria for building your portfolio you stick to them. Do not trade too often, rebalance your portfolio only once or twice a year. Stick to quantitative criteria and do not mix with subjective criteria. Most of these stocks have had some unfortunate events, such as a leaving CEO, lawsuits, earnings warnings, etc. I suspect that these events make that small-cap value stocks are more volatile than the big cap stocks, despite the value in the first category. Obviously there must be some reason why the prices of the small-caps above are discounted. Therefore you should not rely on just one of these stocks, instead buy at least ten. The idea is that in the long run the extra individual volatility pays off and that you beat the main indices.