Investing 101: Profitable Small Cap Stocks with High Short Floats

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(List compiled by Eben Esterhuizen, CFA. Shorts data sourced from Yahoo! Finance. Profitability data from Fidelity, all other data from Finviz.)

Interested in profitable companies that show potential signs of a rebound? If so, the following may be of interest to you...

Below we list six companies that have me the following criteria:

-Market Cap between $300M and $1B
-Short float above 15% (short squeeze candidates)
-More profitable than their industry averages on the basis of trailing twelve month (TTM) gross, pretax, and operating margins.

Are you unfamiliar with the implications of any of the above criteria? If so, use the following information for your review: 

Market Capitalization (Market Cap): Market capitalization, commonly referred to as market cap, is the total market value of a company's outstanding shares. It can be thought of as a measure of company's size. It can be calculated by multiplying the number of shares by the current price of the shares. Companies with higher market cap are considered to have more trustworthy information because they have greater histories of profitability and data.

Small Cap stocks have market values between $300M - $2B.

Trailing twelve months (TTM): An indication that the calculated data has come from the last twelve months. For example, if data released in July 2045 is "TTM" (ie, P/E TTM or "Trailing P/E"), this means the price and the earning-per-share data comes from the twelve-month period of August 2044 to July 2045.

TTM Gross margin: This metric that tells us the percentage of a company's revenue is left after paying all production expenses. Costs include overhead, payroll and taxation. ((revenues - cost of goods sold) / Revenue ) *100  =  Gross margin %

TTM Operating margin: This tells us the percentage remaining after all operating expenses are paid. Operating expenses include: supplies, repairs, research and development, and depreciation. (Operating Income / Net Operating Revenue) *100  = Operating Margin %

TTM Pretax margin:  A company's earnings before taxes. This incorporates all of the expenses associated with business excluding taxes. It can help to determine the overall operating efficiency of the firm. The higher the pretax margin, the more profitable the company. (Net profit before taxes / net sales) *100 = Pretax Margin

The short float of a company is the percentage of shares in a short position (being short sold by short sellers) as a percentage of the total amount of shares available on the market (share float). Short sellers make money when the share price of a stock falls. Therefore, if the short float is high, short sellers are really confident that the share price is going to fall. Because investors frequently pay attention to the behavior of short sellers, a high short float could make investors nervous about a stock, which might in turn cause the share price to fall (like a self-fulfilling prophecy).

Be warned, when a stock becomes highly shorted amid deep pessimism, it can reach a sort of tipping point referred to as a “short squeeze.” There are so many shares currently shorted that any bump up in price triggers a cascade in which short sellers have to cover their positions by buying back the stock, which causes the stock to rally even further. Bears roar, and then shorts fall.

For this screen, we consider a stock with a short float greater than 15% of the total share float, meaning it is a highly shorted stock and a short squeeze candidate.

Do you think any of these profitable names will experience a short squeeze? Use the list as a starting-point for your own analysis.

Analyze These Ideas (Tools Will Open In A New Window)

1. Access a thorough description of all companies mentioned
2. Compare analyst ratings for all stocks mentioned below
3. Visualize annual returns for all stocks mentioned

1. World Acceptance Corp. (WRLD): Engages in small-loan consumer finance business. Market cap at $863.75M, short float at 19.58%. TTM gross margin at 33.45% vs. industry average at 30.06%. TTM operating margin at 31.82% vs. industry average at 25.68%. TTM pretax margin at 28.88% vs. industry average at 23.95%.

2. First Financial Bankshares Inc. (FFIN): Provides commercial banking products and services primarily in Texas. Market cap at $825.25M, short float at 18.16%. TTM gross margin at 90.94% vs. industry average at 71.43%. TTM operating margin at 53.8% vs. industry average at 39.4%. TTM pretax margin at 41.13% vs. industry average at 22.73%.

3. CVB Financial Corp. (CVBF): Operates as a bank holding company for Citizens Business Bank that provides various retail banking and financial services to small to mid-sized businesses, high net-worth individuals, and professionals in the United States. Market cap at $807.27M, short float at 16.60%. TTM gross margin at 74.43% vs. industry average at 71.43%. TTM operating margin at 45.95% vs. industry average at 39.4%. TTM pretax margin at 26.59% vs. industry average at 22.73%.

4. Iridium Communications Inc. (IRDM): Provides mobile voice and data communications services through satellites to businesses, the U. Market cap at $489.77M, short float at 20.15%. TTM gross margin at 67.05% vs. industry average at 50.31%. TTM operating margin at 19.72% vs. industry average at 15.47%. TTM pretax margin at 17.24% vs. industry average at 13.79%.

5. USANA Health Sciences Inc. (USNA): Develops, manufactures, distributes, and sells nutritional and personal care products worldwide. Market cap at $407.77M, short float at 31.22%. TTM gross margin at 82.02% vs. industry average at 71.43%. TTM operating margin at 13.51% vs. industry average at 12.32%. TTM pretax margin at 13.46% vs. industry average at 9.7%.

6. Hollysys Automation Technologies, Ltd (HOLI): Provides automation and control technology and applications in the People's Republic of China. Market cap at $347.01M, short float at 28.07%. TTM gross margin at 36.37% vs. industry average at 36.1%. TTM operating margin at 17.% vs. industry average at 8.8%. TTM pretax margin at 18.23% vs. industry average at 9.62%.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks

Referenced Stocks: CVBF , FFIN , IRDM , USNA , HOLI , WRLD

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