Don't Forget The Little Guy - 4 Small Caps To Consider

The US stock market has produced some heady returns so far this year, and one classification that should not be overlooked is small cap stocks. Typically categorized as those companies with a market capitalization between $300 million and $2 billion, small caps are an important part of a diversified portfolio.

[Read more from Kapitall:  4 Stocks Reporting Earnings Next Week With a History of Positive Earnings Surprises]

And as Business Insider reported earlier this week, US small caps have been outperforming the already strong US markets. The Russell 200 index, a small cap index fund, has returned 22% in the year to date compared to 19% for the S&P 500.

Small cap stocks tend to rely on domestic sales more so than their larger competitors who branch into foreign markets. With US GDP growth expected to increase from 1.5% this year to roughly 3% into 2016, small caps may benefit further from increasing domestic productivity and consumption. 

With this in mind, we ran a screen among US small cap stocks for signs of undervaluation, as well as positive inventory trends. 

First we looked for small caps that appear undervalued relative to their cash flows, indicated by high ratios of levered free cash flow/enterprise value (LFCF/EV). Levered free cash flow is the what remains after deducting interest payments on outstanding debt. Enterprise value is the sum of the firm's value from all ownership sources: market cap, outstanding debt, and preferred shares. When companies have ratios of LFCF/EV in excess of 10%, it may indicate that the company as a whole is being undervalued.

Next we limited our results to those with positive trends in inventory, namely stocks with growth in quarterly revenue greater than growth in quarterly inventory. Since inventory represents the portion of goods not yet sold, faster growth in revenue than inventory is considered an encouraging sign. This may indicate that the company is selling its inventory more readily than in the past – although this might just be a reflection of a change in sales strategies.

Only four companies remained on our list – but investors should remember that classifications such as "large cap" or "small cap" are approximations that can change, so while a stock may be a small cap for now, in the future it's market capitalization can certainly increase or decrease. 

The List

Click on the image below to see analyst ratings over time. Average analyst ratings sourced from Zacks Investment Research.

Analyze These Ideas:  Access a  performance overview  for all stocks in the list.

Do you think small cap stocks will continue to outperform? Use this list as a starting point for your analysis.

1. Dean Foods Company (DF): Operates as a food and beverage company in the United States.  Market cap at $1.93B, most recent closing price at $10.37.

Levered free cash flow at $666.77M vs. enterprise value at $3.71B (implies a LFCF/EV ratio at 17.97%).  

Revenue grew by 0.29% during the most recent quarter ($2,878.78M vs. $2,870.45M y/y).

Inventory grew by -9.01% during the same time period ($433.33M vs. $476.25M y/y).

Inventory, as a percentage of current assets, decreased from 27.64% to 26.95% during the most recent quarter (comparing 3 months ending 2013-03-31 to 3 months ending 2012-03-31).

 

2. Inter Parfums Inc. (IPAR): Engages in the manufacture, marketing, and distribution of various fragrances and fragrance related products primarily in the United States and Europe.  Market cap at $1.03B, most recent closing price at $33.66.

Levered free cash flow at $168.79M vs. enterprise value at $691.56M (implies a LFCF/EV ratio at 24.41%).  

Revenue grew by 29.29% during the most recent quarter ($213.81M vs. $165.37M y/y).

Inventory grew by -39.74% during the same time period ($110.83M vs. $183.93M y/y).

Inventory, as a percentage of current assets, decreased from 47.09% to 17.65% during the most recent quarter (comparing 3 months ending 2013-03-31 to 3 months ending 2012-03-31).

 

3. Kimball International, Inc. (KBALB): Manufactures and sells electronic assemblies and furniture in the United States and internationally.  Market cap at $424.97M, most recent closing price at $11.16.

Levered free cash flow at $39.80M vs. enterprise value at $317.65M (implies a LFCF/EV ratio at 12.53%).  

Revenue grew by 6.01% during the most recent quarter ($301.49M vs. $284.41M y/y).

Inventory grew by 0.94% during the same time period ($128.21M vs. $127.02M y/y).

Inventory, as a percentage of current assets, decreased from 33.92% to 31.58% during the most recent quarter (comparing 3 months ending 2013-03-31 to 3 months ending 2012-03-31).

 

4. Checkpoint Systems Inc. (CKP): Manufactures and markets identification, tracking, security, and merchandising solutions for the retail and apparel industry worldwide.  Market cap at $660.24M, most recent closing price at $16.03.

Levered free cash flow at $92.17M vs. enterprise value at $610.23M (implies a LFCF/EV ratio at 15.1%).  

Revenue grew by 3.22% during the most recent quarter ($148.84M vs. $144.19M y/y).

Inventory grew by -37.34% during the same time period ($83.85M vs. $133.82M y/y).

Inventory, as a percentage of current assets, decreased from 29.26% to 20.29% during the most recent quarter (comparing 13 weeks ending 2013-03-31 to 13 weeks ending 2012-03-25).

 

 

( List compiled by Emily Smykal, Kapitall Senior Editor. LFCF/EV data sourced from Yahoo! Finance, accounting data sourced from Google Finance, all other data sourced from Finviz.)

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