The service industry does not garner quite the market attention of tech and healthcare. But growth is growth, and there are plenty of service-oriented companies capable of garnering major returns even if they’re not on the cusp of releasing a nifty new gadget or garnering FDA drug approval.
To isolate service plays we felt might be poised to grow, we applied three pieces of criteria.
We wanted to find small cap stocks that possessed solid fundamentals, high marks from analysts, and a chance for growth based on a classic value investing formula. Here’s the specifics we used to delineate the plays we felt might grow in 2014:
#1 The company has to be included in our Small-Cap Stars project.
In creating our Small-Cap stars portfolio. Equities.com required service stocks to meet certain benchmarks, like having a large percentage of institutional holdings.
#2 Analyst consensus is at least a “buy” on the stock.
While we trust our own metrics, it doesn’t hurt to have the agreement of a majority of analysts on certain obscure plays.
#3 The company’s PEG ratio is less than one.
PEG ratio is simply price/earnings divided by annual EPS growth. Companies with a PEG ratio less than 1 are thought to be undervalued by the market, and the lower the PEG the more undervalued the company is.
We found five service plays that fit this model. They are:
Lakes Entertainment (LACO)
Industry: Resorts and Casinos
Market Cap: $124.19 million
PEG Ratio: 0.39
Celadon Group Inc. (CGI)
Market Cap: $460.66 million
The Hackett Group (HCKT)
Industry: Management Services
Market Cap: $184.68 million
PEG Ratio: 0.89
PC Connection Inc. (PCCC)
Industry: Catalogue & Mail Order House
Market Cap: $631.72
PEG Ratio: 0.58
Navios Maritime Holdings Inc. (NM)
Market Cap: $967.68 million
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