How to Find Under-Valued Small-Cap Stocks

Stamps.com (STMP) shareholders just saw their fortunes shoot up some 50%, as seen in a stock chart, on little more than an earnings surprise that made investors realize they’d underestimated the company. Since we all would love to replicate that windfall, YCharts looked at Stamps.com’s pre-boom data for clues that might have alerted investors to the bargain. By applying those clues to the YCharts Stock Screener, we found some other small caps that Wall Street might be undervaluing.

STMP Chart

STMP data by YCharts

Several notable data changes preceded the rise in Stamps.com, a profitable, $557.78 market cap company that gives its subscribers the ability to print postage on their own PC printers. Revenue growth was strong, although not as high as it had been in previous years. Financial problems at the U.S. Postal Service caused investors to worry about the comcpany’s continued growth potential, pushing down share price valuations. Its PE ratio dropped from about 31 at the end of 2011 to about 13 just before April’s earnings release. Its PE growth ratio was down to about 0.3. The bargain went away with the recent share price rise.

We set the YCharts Stock Screener to look for companies with market caps between $300 million and $2.0 billion, revenue growth of at least 5%, a historic PE ratio less than 12 and a forward PE of less than 15. (To eliminate some companies with serious issues, we added lower limits of 5 on the PE ratio screens.) We also set the Screener to exclude REITs. The result: 49 growing, profitable small caps with relatively low valuations to consider. Consider, for example Crocs (CROX) and Allied Air Worldwide (AAWW).

Crocs has come a long way from selling one ugly rubberized clog in the wholesale market. The company is now building hundreds of stores worldwide to sell a full line of resin footwear. A lot of investors pulled out of Croc last year on worries that economic conditions in Japan and Europe were not good for new shoe stores there. But the company still typically produces double-digit revenue growth, and analyst forecasts call for nearly 11% in revenue growth this year.

CROX Revenue Quarterly YoY Growth Chart

CROX Revenue Quarterly YoY Growth data by YCharts

The pull-out last year created lower share price valuations that eventually won back investors, as seen in a stock chart, although Croc shares still trade at a modest 12 times forward earnings. Its share price has risen about 21% so far this year.

Atlas Air Worldwide was a more popular investment back when the military needed lots help lugging cargo and personnel to war sites around the world. When the defense business started dropping off last year, so did the company’s share price. Its forward PE ratio was below 8 earlier this year, and even with a recent share price rise, it remains below 10.

AAWW PE Ratio TTM Chart

AAWW PE Ratio TTM data by YCharts

A significant earnings beat earlier this month gave some confidence to Atlas Air’s peace-era prospects. (The company leases planes and crews to cargo services companies, like British Airways’ cargo operations and DHL Express.) Several funds took positions in the company last quarter, including Oakmark Equity and Income and Harris Associates Equity and Income. Revenue growth is forecast at a modest 7.8% this year. But the company has a new fleet now, and the better fuel efficiency and lower maintenance costs are expected to boost profit margins.

The bonanza at Stamps.com came because investors realized that the market had overestimated the size of its problems. (Turns out USPS doesn’t have to make money for Stamps.com to succeed.) Its low share valuation made that understanding actionable. The charts can find the companies with growth and low valuations. A little digging into the companies’ stories determines if their low share prices are true bargains or merely justified. If we’d done this a month ago, we probably would have found Stamps.com.

Dee Gill, a senior contributing editor at YCharts, is a former foreign correspondent for AP-Dow Jones News in London, where she covered the U.K. equities market and economic indicators. She has written for The New York Times, The Wall Street Journal, The Economist and Time magazine. She can be reached at editor@ycharts.com.

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