Investors often look at small cap stocks for growth. The math supports this idea. Smaller companies can grow quickly and the stock market is likely to reward growth with a high valuation. This means a small stock market investment in a small company can deliver a large gain to an investor.
But, small companies can be risky. They often lack a track record of success that extends back several years which means an investor is buying the stock based on the company’s prospects for the future. The future is, of course, uncertain, and that is one reason there is a high degree of risk in small caps.
These problems lead many investors to turn their attention to large cap stocks. These stocks usually have financial statements extending back several years that demonstrate steady sales and profits. It is often this record of success that leads to the company growth.
These differences can result in different approaches for investors.
Small cap investors will generally be forced to evaluate future prospects. They may find estimates of earnings prepared by Wall Street analysts. These analysts are generally skilled in evaluating an industry and developing estimates of sales growth in an industry.
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Starting with that information, the analysts will then create detailed financial forecasts for a company in the industry. They often create a series of complete financial statements for the company, based on their expectations.
These expectations are then used to find price targets for the stock. The target could be based on the expected earnings or the analyst might use the company’s expected cash flow.
While analysts’ forecasts can be useful, they are expensive to produce. For that reason, Wall Street firms may not publish analysis for small companies. Investors may find one or two forecasts to work with on small stocks.
For large stocks, there may be dozens of analysts providing forecasts for a company. This information can help to increase an investor’s confidence in the company’s future prospects. But, the investor will also usually have access to several years of financial data.
Reviewing the Past Can Help Forecast the Future
At its core, investors are forecasting the future when they buy a stock. They may not develop a precise forecast in terms of dollars and cents but by buying, they are indicating they expect the company’s stock to do well in the future. This is a general forecast of the future.
To develop the forecast, it can be useful to review the past. For investors, this usually involves a review of financial information. The information can provide a history of sales and profits. Investors may believe if a company grew sales and earnings in the past they could continue to do so in the future.
Small companies may not have a history of sales and earnings growth. This may because they have not been operating for years. Or, it may be because the company has not reported sales or earnings because a product may be in development or for some other reason.
If a small company does have sales or earnings histories, that could be useful information.
A Screen for Cheap Stocks With Good Histories
This week, we developed a screen to find stocks trading investment tips at low prices with a history of sales and earnings growth. To find potential buy candidates, we can screen companies using the free screening tool at FinViz.com. This tool allows us to find companies meeting a variety of criteria.
Specifically, we screened for:
- Stocks trading below $2 a share to focus on cheap stocks.
- Both sales and earnings growth over the past five years to find a history of improving operations. Companies may report a loss but the loss would be less than it was five years ago.
- Price gains for the stock price over the past 6 and 12 months to find stocks with momentum.
The specific screen is shown below:
The list includes six stocks.
Digital Turbine, Inc. (Nasdaq: APPS) provides media and mobile communication solutions for mobile operators, app advertisers, device original equipment manufacturers, and other third parties worldwide.
The company’s Advertising segment offers Ignite, a mobile application management software to control, manage, and monetize the applications that are installed on mobile devices; Discover software, which provides application installation and management, as well as detailed reporting to advertisers and carriers; and mobile user acquisition platform that allows mobile advertisers to engage with right customers for their applications.
The Content segment offers Marketplace, an application and content store that manages the retailing of mobile content, including features, such as merchandising, product placements, reporting, pricing, promotions, and distribution of digital goods, as well as the distribution and licensing of content across various categories comprising music, applications, wallpapers, eBooks, and games; and Pay, an application programming interface that integrates billing infrastructure between mobile operators and content publishers to facilitate mobile commerce.
Forward Industries, Inc. (Nasdaq: FORD) designs, markets, and distributes carry and protective solutions primarily for hand held electronic devices in the Americas, the Asia-Pacific, Europe, the Middle East, and Africa. It offers hand held electronic devices that include soft-sided carrying cases, bags, clips, hand straps, protective plates, and other accessories made of leather, nylon, vinyl, plastic, PVC, and other synthetic materials.
Luna Innovations Incorporated (Nasdaq: LUNA) develops, manufactures, and markets fiber optic sensing, and test and measurement products worldwide. The company also provides applied research for customers principally in the areas of sensing and instrumentation, advanced materials, and health sciences. Products are sold to telecommunications companies, defense agencies, government system integrators, researchers, original equipment manufacturers, distributors, testing labs, and strategic partners directly.
Palatin Technologies, Inc. (NYSE: PTN) is a biopharmaceutical company that develops targeted, receptor-specific peptide therapeutics for the treatment of various diseases in the United States. The company’s principal product is Bremelanotide, an as needed subcutaneous injectable peptide melanocortin receptor agonist, which is in the Phase III clinical studies for the treatment of premenopausal women with hypoactive sexual desire disorder (HSDD).
RiceBran Technologies (Nasdaq: RIBT) processes and markets healthy, natural, and nutrient dense products derived from raw rice bran. The company manufactures and distributes stabilized rice bran (SRB) in various granulations with other products and derivatives.
It also extracts crude rice bran oil and defatted rice bran from rice bran, which are processed into refined rice bran oil, as well as compounded animal nutrition products for horses, cows, swine, sheep, and poultry; and various food and animal nutrition products derivatives and co-products.
Sify Technologies Limited (Nasdaq: SIFY) provides integrated information and communications technology solutions and services in India, as well internationally. The company’s Telecom Services segment offers Internet protocol based virtual private network services.
The company’s Data Centre Services segment provides co-location, regular backup, server load balancing, and remote backup solutions; messaging, shared hosting, network, and security services; storage and virtualization services; and managed voice services to resident enterprises.
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Triple-Digit Returns looks for companies that are misunderstood and potentially undervalued, lost darlings (companies that are like Ford), mergers or spinoffs that could benefit share holders, or companies that show signs of strong interest by insiders who know the company best and see value.
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