Small Financial Plays with a Chance to Break Out

March 4, 2014

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2 min read

High volatility is often considered a worrisome facet in an investment. Volatility, after all, is synonymous with instability, and investors aren’t usually looking for the Next Unstable Thing. But volatility can actually be viewed as a positive, if you consider what’s causing that volatility.

Sometimes what’s driving that whipsaw action is merely high investor interest. The interest might be a combination of positive and negative, to be sure, but the interest is there nonetheless. If high volatility is combined with strong fundamentals, there’s a chance that the stock might have a chance to break out, and could be an unusually cheap buy, as the majority of investors are scared away by the stock’s instability.

METHODOLOGY

We decided to limit our search to financial stocks in the “small-cap” sector, or those with a market capitalization between $300 million and $2 billion. After that, we looked for stocks in that category that fit the following parameters:

Experienced volatility of more than 5 percent over the last month.

Volatility of over 5 percent is quite unusual, and indicates that the company has been subject to extreme whipsaw action.

Has a current ratio over 1.

A current ratio higher than one indicates that the company is on relatively stable ground, and possesses the ability to pay off their short-term debts.

Has an operating margin over 25 percent.

A high operating margin indicates the business is utilizing capital wisely, a must for a small-cap financial.