James Dennin, Kapitall Writer: Small cap stocks can offer value just as well as their larger counterparts during times of uncertainty.
The stock market is slowly recovering after being roiled by concerns about Syria at the start of the week. After Secretary of State John Kerry confirmed rumors that the Syrian regime had used chemical weapons on its own people, the markets tumbled to their lowest point since the start of July. Most of the unease stems from the increasing likelihood of a military strike, and the impact of further conflict in the Middle East on oil futures. Energy stocks Chevron Corp. (CVX) and Exxon Mobile (XOM) are trading up 1.7% this afternoon, amid speculation that oil prices will go up as the debacle plays out.
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However, the brief depression in the market means prices are lower compared to a week ago, making this a good time to buy for value investors. We decided to run a screen on value investments among small cap stocks, for investors who are looking to expand their portfolios without spending too much.We started by looking at institutional buying among small cap stocks with 438 stocks experiencing upswings in institutional ownership over the current quarter. Because small cap stocks tend to be more volatile, we limited the screen further by looking for some positive indicators favored by value investors. These included a low price to earnings ratio (P/E), a valuation that tells you essentially how much investors are willing to spend on each dollar of profit from their shares. High P/E ratios often mean that the market is bullish on the stock, and expecting more growth. Lower P/E ratios are a possible indicator that a stock is undervalued. Next, we looked at sales growth quarter over quarter, which is a window into how the company is doing at the moment. However, because this only looks at recent sales, it's not always clear if growth is coming from changes in the company, or perhaps seasonal trends. For that reason, we searched for explanations of the quarterly growth. One stock among our results, Ellington Financial (EFC), recently announced its ex-dividend date (along with a robust yield of 13.77%). And Leap Frog (LF) has a new partnership with Random House, giving the technology manufacturer a massive new market for it's learning toys. Finally, we looked at long term debt to equity ratios – to make sure that none of the companies were too leveraged. We were left with five small cap stocks on our list.
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