Since this summer's market low, small-cap stocks have been outperforming large cap stocks and where it is most evident is in growth and value stocks.
Small caps have delivered 272% total return compared to a total return of 218% for large-cap stocks, RBC Capital Markets' Chief Equity Strategist Jonathan Golub wrote in a note to clients. RBC Capital Markets is a unit of Royal Bank of Canada.
"Small cap companies are expected to deliver faster relative earnings growth (14.0% vs. 6.8%) over the next year," Golub wrote. "This trend is quite broad-based, playing out in 9 of 10 sectors. However, the group only trades at a slight premium (18.2x vs. 16.4x), making it particularly attractive on a PEG basis."
Given the current environment, investors should lean towards investing in "secular and stable growth stocks," Golub wrote in the Nov. 30 note.
The list of stocks below are companies with "persistently strong top-line growth and improving fundamentals, based solely on quantitative criteria," the analyst said. The group is paired with ratings from TheStreet Ratings, TheStreet's proprietary ratings tool, for another perspective.
TheStreet Ratings uses a quantitative approach to rating over 4,300 stocks to predict return potential for the next year. The model is both objective, using elements such as volatility of past operating revenues, financial strength, and company cash flows, and subjective, including expected equity market returns, future interest rates, implied industry outlook and forecasted company earnings.
Buying an S&P 500 stock that TheStreet Ratings rated a buy yielded a 16.56% return in 2014, beating the S&P 500 Total Return Index by 304 basis points. Buying a Russell 2000 stock that TheStreet Ratings rated a buy yielded a 9.5% return in 2014, beating the Russell 2000 index, including dividends reinvested, by 460 basis points last year.
Note: Year-to-date returns are based on Nov. 30 closing prices.MHO data by YCharts
13. M/I Homes Inc. (MHO)
Industry: Consumer Goods & Services/Homebuilding
Market Cap: $584 million
Year-to-date return: 1.7%
M/I Homes, Inc., together with its subsidiaries, operates as a builder of single-family homes in Ohio, Indiana, Illinois, Maryland, Virginia, North Carolina, Florida, and Texas, the United States.
2014 Revenue Growth: 17.2%
2015 Expected Revenue Growth: 13.1%
2016 Expected Revenue Growth: 21.1%
3-Month EPS Change: 2.8%
TheStreet Said: TheStreet Ratings team rates M/I HOMES INC as a Hold with a ratings score of C+. TheStreet Ratings Team has this to say about their recommendation:
We rate M/I HOMES INC (MHO) a HOLD. The primary factors that have impacted our rating are mixed - some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its revenue growth, attractive valuation levels and solid stock price performance. However, as a counter to these strengths, we also find weaknesses including generally higher debt management risk, disappointing return on equity and weak operating cash flow.
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- MHO's revenue growth has slightly outpaced the industry average of 9.5%. Since the same quarter one year prior, revenues slightly increased by 9.9%. This growth in revenue appears to have trickled down to the company's bottom line, improving the earnings per share.
- After a year of stock price fluctuations, the net result is that MHO's price has not changed very much. Although its weak earnings growth may have played a role in this flat result, don't lose sight of the fact that the performance of the overall market, as measured by the S&P 500 Index, was essentially similar. Despite the fact that it has already risen in the past year, there is currently no conclusive evidence that warrants the purchase or sale of this stock.
- The debt-to-equity ratio of 1.05 is relatively high when compared with the industry average, suggesting a need for better debt level management.
- The company's current return on equity has slightly decreased from the same quarter one year prior. This implies a minor weakness in the organization. In comparison to the other companies in the Household Durables industry and the overall market, M/I HOMES INC's return on equity is significantly below that of the industry average and is below that of the S&P 500.
- You can view the full analysis from the report here: MHO