In Friday's column, I reviewed the results of a stock screen that focused on profitable small-cap value companies holding healthy amounts of cash, which I ran last January. Although there were just a handful of companies meeting the criteria, the average returns were decent, beating the relevant benchmarks handily. But with just six names making the cut, the true effectiveness of this screen is inconclusive, at least for 2011. That being said, it is worthy of another test for 2012.
As a recap, the screen is designed to identify smaller companies that are trading at reasonable price-to-earnings (PE) multiples and have great liquidity, ample amounts of cash and low levels of price-to-book ratios. Here are the specific screening criteria, which are unaltered from last year's screen:
- Market capitalization between $100 million and $3 billion,
- Price-to-earnings ratio of less than 15,
- Long-term debt-to-equity ratio of less than 50%,
- Profitable during the trailing 12 months and in the latest fiscal year,
- Cash in excess of 20% of market cap,
- Price-to-book ratio of less than 1,
- Quick ratio less than 1, and
- Any sector except for the financial space.
The opportunity set is bigger this year, and 19 names made the cut. Some of them are very familiar. I already hold fish oil and fish meal producer Omega Protein (OME), while Benchmark Electronics (BHE)and JAKKS Pacific (JAKK) are members of my JIMS CRAB FEST portfolio for Cheapskates.
There are a handful of companies with market caps in excess of $1 billion aka large caps in my world; these include Telephone & Data Systems (TDS), ITT (ITT), Vishay Intertechnology (VSH), Thompson Creek Metals (TC), and Atlas Air Worldwide Holdings (AAWW).
From there, it's a fairly diverse set of companies and industries. Among the smallest names is outdoor recreation products company Johnson Outdoors (JOUT), which ended its fiscal year with $44.5 million, or nearly $5.00 per share in cash, and just $15 million in debt. The company generated more than $3.00 per share in free cash flow for the year, and currently trades just below tangible book value. Johnson had a fairly successful year in 2011 with revenue rising 6.5% to $497 million, and pretax income up 34% to $12.3 million.
Others making the list include Century Aluminum (CENX), OmniVision Technologies (OVTI), Career Education (CECO), Iridium Communications (IRDM), STR Holdings (STRI), blast from the tech bubble past name Safeguard Scientifics (SFE), Alpha and Omega Semiconductor (AOSL), Astex Pharmaceutical (ASTX), Westell Technologies (WSTL) and PowerSecure International (POWR).
Putting all 19 names together reveals a portfolio with some interesting metrics, at least to a value guy: They have an average price-to-earnings ratio of around 7, an average price-to-book ratio of 0.78, and average cash-to-market cap of nearly 50%. There is little doubt that there are a few clunkers on this list -- there always are -- but it will be interesting to see how they perform as a group in 2012.