Small companies typically outperform over time because they
have greater growth prospects than themarket leaders.
Between 1927 and 2012, for instance, small caps produced
annual returns of 12.9%, compared with 9.9% for large companies.
Even now, when many indices have hit highs, the S&P 600 Small
CapIndex has gained 31%, in the pastyear compared with a 23%gain
for the S&P 500 over the same period.
But most retail investors shy away from small caps mainly
because they perceive them to be part of the seedy underbelly
ofinvesting , the world of pump-and-dump boiler rooms. That
reputation is not entirely undeserved. Manyilliquid companies
exist whose financials are at best an educated guess.
So to find small-capstocks that could be assumed to be
reasonably safeinvestments , I used a several-step screening
process, starting with solid fundamentals and substantialinsider
andinstitutional ownership .
Among companies with market caps of no more than $90 million,
I found 23 that had positive returns onequity and assets, a
forward price-to-earnings (P/E ) ratio, and institutional and
insider ownership of at least 10%.
*of those with dividends
I compared the one-year returns of these stocks with the
S&P 600 Small Cap Index. Anystock that had crossed below the
index and was trending down was dropped, which left me with six
contenders -- three of which paid dividends. Like many investors,
I have a bias toward stocks that pay dividends, so let's look at
What I found were three companies which each have been on a
solid growth trajectory.
Acme United (
is a global supplier of cutting, measuring and safety products to
consumer and industrial markets. It has neatly tracked the
S&P small-cap index and shown the least volatility of the
three stocks. While its $43.7 millionmarket cap is the lowest of
the three, its nearly $14 share price is the highest. It has a
forward P/E of 9.2, and itsdividend yield is the best of the
three at 2.3%. In its most recent quarter, Acme posted a 7%
increase innet income and a 3% rise inearnings .
On the institutional side, North StarInvestment holds nearly
400,000shares and has made more than a dozen insider purchases
this year. Acme'sCEO , Walter Johnson, did sell 8,000 shares this
month, but he still holds more than 350,000 shares.
Eastern Virginia Bankshares (Nasdaq: EVBS)
is a bankholding company . It received $24 million in
financialbailout funds , but it's been released from its
agreement with regulators because it raised enoughmoney
throughprivate placement . Its $66.7 million market capputs it in
the middle of the group, although its share price is currently
the lowest at just over $6. It has a forward P/E of 9.2, but its
1.1% dividend yield is the least of the three. Net income and
earnings were down for the most recent quarter, mainly on
charge-offs for non-performing and uncollectible assets and other
EVBS' management and directors have been on a spree buying
back stock this year, including 19 transactions in June alone at
$4.55 a share -- nicely timed before the company said it had been
released from itsTroubled Asset Relief Program (TARP) .
PzenaInvestment Management (
is aninvestment manager catering towealthy families and other
institutions. It has the largest market cap at $85.4 million, and
its share price, although the highest at about $7, buys the most
market cap per dollar of the three. It has a forward P/E of 14
and a dividend yield of 1.7%. For the most recent quarter,revenue
grew 5.4% and earnings were flat. Although Pzena'sgross profit
margin was down from the previous year, it remains a very high
Top holders include FineCapital , with nearly a quarter of a
million shares, and Renaissance Technologies, with about 125,000
shares. Renaissance's bet on PZN is interesting because it
usually is heavily invested inlarge caps .
Risks to consider:
Neither past performance nor insider or institutional
investment is aguarantee of future success.
Action to Take -->
Together, these three stocks are quite promising. Due to the
heavier institutional investment, I give PZN a slight edge over
ACU. EVBS still has a way to go to prove itself, but now that
it's free of the bailout program, it could really blossom.