Small-cap stocks represent a particularly risky endeavor for investors; smaller companies, even those with the strongest fundamentals, are simply more likely to be susceptible to the vicissitudes of their respective sectors and industries.
This is especially the case these days for small-caps operating in the Industrial Goods sector, where all are at the mercy of the supply-demand balance dictated by unpredictable global economic conditions, to say nothing of the many political conflicts that seem to have become a defining characteristic of our time.
But great risk can also bring great reward, and those companies that do manage to hurdle the obstacles and successfully capitalize on industry trends can generate excellent returns for investors, if not provide a fruitful long-term equity position as these smaller firms expand on their successes.
Locating such companies, however, is easier said than done, and as such is one of the principal motivations behind Equities.com’s recent premiere of the Small-Cap Stars series.
Small-Cap Stars is the brainchild of Equities.com’s own team of analysts, who have developed a methodology by which to screen for the most promising small-caps based on sector-specific criteria, in order to introduce investors to the promising but unheralded stocks that they might otherwise have overlooked.
The methodology, as applied to small-cap industrials, is based on the following five sector-specific fundamental criteria:
-Enterprise Value: Enterprise value is determined by adding a company’s market-cap to the sum of its marketable debt, and then subtracting its cash-on-hand from this figure. The larger the business, the greater the stability, and the greater the likelihood of a larger and more profitable contract.
-Cash: Firms with ample cash are better-positioned to weather unexpected situations. This metric also confirms that debt is a more important factor in enterprise value than cash.
-Growth in Revenue Last Year: A company’s year-over-year revenue growth is one of the best and most simple ways to determine if such growth is likely to continue in the future.
-Net Margin: A higher net margin indicates how much leeway a company has to price its goods to its own advantage.
-Book Debt-to-Capital: Industrial goods companies that raise money through debt, as opposed to equity, are likely to be more stable.
A brief sampling of the small-caps that align with these criteria would seem to offer a validation the simple but astute methodology underpinning the Small-Cap Stars project:
DryShips Inc. (DRYS) – The $1.3 billion DryShips was founded in 2004, and is based out the Greek capital city of Athens. The company has had major success in plying one of the oldest trades to be passed down from Hellenic times, namely shipping. Currently, DryShips operates a fleet of 42 dry bulk carriers with a combined capacity to carry some 4.4 million tons, as well as 10 tankers with a combined capacity of 1.3 million tons. Furthermore, the company has made significant moves into the upstream side of the oil and gas business, primarily through its ownership of offshore drilling rigs. Shares are trading for $3.40 each, and have more than doubled in 2013 on an advance of 112 percent.
Astronics Corporation (ATRO) – The $629 million New York-based company develops aerospace products for both military and commercial uses, as well as test systems for military weapons and communications networks. Shares are currently priced at $41.50 a piece, representing a year-to-date gain of over 80 percent.
G&K Services Inc. (GK) – The $1.07 billion company is headquartered in Minnetonka, Minnesota, and provides branded uniform and facility services to an entire gamut of businesses throughout the US, Canada, Ireland, and the Dominican Republic. G&K makes and launders uniforms, but also provides all manner of safety equipment, including traction-control and anti-fatigue mats. Shares are currently trading for $55.60 a piece, and are up over 65 percent on the year.