Small-Cap Stars: Basic Materials Stocks

Michael Teague  |

Shining a much-needed light on the small-cap companies best able to navigate the shifting trends in their respective industries is one of the primary motivations behind the introduction of's Small-Cap Stars series.

To this end, our research analysts have determined a set of fundamental criteria for each economic sector by which investors can locate the most compelling small-cap stocks on the market.

Basic Materials is just one space through which the methodology developed by our analysts has been validated. Though notorious for being a particularly high-risk/high-reward sector the economy, 2013 has been an especially eventful, if not tumultuous year.

Much of this has been the result of momentous changes in the oil & gas industries, where unconventional sources and production methods are carrying the day. As a result of scientific and technological developments, enormous and previously unreachable deposits of energy lying under thousands of feet of solid rock beneath the surface of the earth have become the main attraction for energy producers.

The focus on shale reserves in the US, as well as the expertise and equipment necessary to access them, has created a fertile climate for independent explorers and producers, and has generally provided an opening for smaller, more nimble companies to stake a claim in America’s energy renaissance.

It is no coincidence that the methodology developed by’s analysts specifically for the basic materials sector yields out some of the best-performing small-caps operating in the independent and exploratory oil & gas industries.

The methodology consists of the following fundamental criteria:

-Price-to-Book Value: A negative ratio means the company's shares are actually trading less than it is worth if its assets were to be liquidated.

-Invested Capital: Companies with higher invested capital can reinvest in more machinery, thus producing more goods, and thus increasing returns on invested capital to its shareholders and debt holders.

-Low Depreciation: Companies with quickly depreciating assets lose book value, and thus lose net worth causing their stock price and future prospects to go down.

-Trailing Net Income: High trailing net income indicates a company can maintain revenues and generate a profit consistently throughout a fiscal year.

-Institutional Holdings: Significant institutional ownership suggests a company's potential is validated by major asset management firms, or the "smart money."

A small sample of the best-performing stocks according to these fundamental criteria would seem to be an affirmation of the methodology developed by our analysts:

Matador Resources Company (MTDR) – The Dallas, Texas-based company develops and produces oil and natural gas from shale plays throughout the US in Texas, Louisiana, New Mexico, Wyoming, Utah, and Idaho. With an estimated 24 billion barrels of oil equivalent and 80 billion cubic feet of natural gas under its purview, the $923 million company has seen shares more than double so far in 2013 to the current price of $16.50.

Pioneer Southwest Energy Partners (PSE) – The $1.6 billion dollar company headquartered in Irving, Texas, sits on about 50 million barrels of reserves through its operations in Texas and New Mexico. The stock has also more than doubled in price on the year, up nearly 115 percent to $46 per share.

Carrizo Oil & Gas (CRZO) – The Houston, Texas-based Carrizo Oil & Gas is present in the most  productive shale plays in the US, not only in its home state, but also in the nation’s northeast, where the massive Marcellus shale run beneath New York, Pennsylvania, Ohio, and parts of Virginia and West Virginia. Carrizo is currently sitting on some 50 million barrels of oil equivalent, and over 400 billion cubic feet of natural gas. Shares have surged 86 percent on the year, to nearly $40 a piece.

Stock price data is provided by IEX Cloud on a 15-minute delayed basis. Chart price data is provided by TradingView on a 15-minute delayed basis.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not necessarily represent the views of Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to:

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