By Peter Ashton
Friday, May 25th, 2018
In The Globe and Mail, Peter Ashton uses Strategy Builder to find U.S.-listed small caps poised to outperform large-cap rivals.
U.S.-listed small-cap stocks that look poised to outperform their large-cap cousins. In the past few weeks, U.S. stocks have resumed their rally, edging up off their lows set in early April. Over the past quarter, small-cap stocks, represented by the Russell 2000 Index, have dramatically outperformed their larger-cap rivals in the S&P 500. While the S&P 500 is down 0.5 percent in the past quarter, the Russell 2000 is up by 4.4 percent, with 4.2 percent of that coming in the past month. As the U.S. economy continues its expansion, small-cap stocks are expect-ed to continue this recent out-performance.ed.
The Screen
We will be using Trading Central Strategy Builder to search for U.S.-listed small-cap stocks with strong revenue growth and operating margins along with reasonable valuations.
We will screen for U.S. stocks with a market capitalization between US$1-billion and US$4-bil-lion. For comparison, the Russell 2000 constituents have a weighted average market cap of US$2.4-billion. To ensure we consider only well-valued candidates, we will filter to include only companies with forward price-to-earnings ratios of 25 or less.
To focus in on stocks that have demonstrated strong revenue growth and profitable operations, we will select only stocks with revenue growth (last quarter compared with prior year) of 15 percent or more and operating margins (trailing 12 months) also of 15 percent or more. Last, to further extend the theme of selecting small-cap outperform-ers, we will consider only stocks rated “strong buy” by a consensus of industry analysts, according to Morningstar data.
What did we find?
Ranking near the top is FTS International Inc., a Fort Worth, Tex.-based oil-services company. FTS has the highest quarterly revenue growth on our list at 119 percent and the lowest forward P/E ratio at 4.5. The company’s stock price has appreciated significantly over the past month –more than 10.7 percent – on the back of strong revenue and a surge in oil prices.
The largest company on our list is Canadian miner Kirkland Lake Gold Ltd., with a market capitalization of US$4-billion –the very top end of our screening range. The company’s stock is up 17 percent in the past month on the back of strong quarterly results announced on May 2.
Trading Central Strategy Builder provides a back-testing capability to evaluate how well an investing strategy would have worked in the past. Using a five-year historical period with quarterly re balancing, the screen described had a 25.4-percent annualized return compared with 10.5 percent for the S&P 500 and 10.6 percent for the Russell 2000 Index.
The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Trading Central in respect of the investment in financial instruments. Investors should conduct further research before investing.
