Small cap success stories are notable, but they’re not the norm. As a percentage, far fewer break through than go on to achieve major success. But regardless of the odds, small caps continue to be enticing for investors. Their low price and exponential growth potential is simply too attractive to ignore. However, small caps can also be quite volatile and unpredictable, seemingly moving one way or the other with no explanation, much less notice.
In our attempt to help quantify what makes certain small caps more or less successful, Equities.com has launched the Small-Cap Stars series. Factoring in over 40 different fundamentals and searching for those that were most statistically significant, Equities.com has begun highlighting companies we believe to have a strong chance of outperforming the rest of the sector on the year.
One sector to pay special attention to is Financials, a sector that is facing future uncertainty stemming from both the government shutdown and a looming debt ceiling crisis. Despite these recent setbacks, Financials has been quite lucrative for investors this YTD. Out of all the sectors, Financials is the highest performing sector this year, as it continues to rebound mightily from the 2008 crisis.
In this eventful year for the sector, Equities.com’s research team concluded that these criteria are statistically meaningful in determining which financial small caps found success so far this year.
- Price-to-Book Value Ratio: The price to book value ratio measures the price of the company stock to the book value per share relative to its peers.
- Value/Book Value of Capital: This ratio focuses on the value of the company's equity and interest-bearing debt in the market and on the books.
- Three-Year Standard Deviation: A measure of volatility for the three-year mean of the stock price. Increased volatility has shown a positive correlation with an increase in share price. However, this should be taken in coincidence with the other metrics.
- Fixed Assets/Total Assets (Negative): Banks do not make their money off of fixed assets, so a higher ratio would indicate a poor use of their money.
- Market Debt-to-Capital: Financial companies typically will engage in higher leverage, but this is usually concordant with being a healthier institution, ironically. Only the more solvent banks can engage in higher leverage
Here is a small sample of successful small caps that possessed both these strong fundamentals and ratcheted high returns in 2013:
MGIC Investment (MTG)
The Milwaukee-based holding company controls several private mortgage insurance companies. Their various subsidiaries are licensed to do business in all 50 states, Puerto Rico, and the District of Columbia. The company has had a robust year, gaining 142.62 percent return
Tower Financial Corp (TOFC)
This regional bank operates exclusively in Indiana cities Fort Wayne and Warsaw. In August of this year the bank offered a special dividend of .25 cents a share two weeks after posting a $1.8 million profit in Q2 2013. Tower has a return of 104.31 percent on the year.
Intervest Bancshares Corp (IBCA)
Intervest is headquartered in the heart of New York City, and sports on location in New York and six locations in Florida. This $167 million market cap bank has returned 97.15 percent on the year.
Macatawa Bank Corporation (MCBC)
Macatawa serves residents of Western Michigan with branches in Allegan, Kent, and Ottawa counties. This regional bank reported $3.8 million in net earnings in Q2 2013 over $2.6 million in the year prior, crediting growing capital and strong retail banking results. Macatawa has gained 78.63 on the year.
Western Alliance Bancorp (WAL)
The regional bank holding company Western Alliance is headquartered in Phoenix and serves customers in the Arizona, Nevada, and California through five subsidiaries. Western Alliance has gained 76.66 percent on the year.
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