Reasonable valuation, matched with good growth used to be all the rage a few years ago. GARP, as this was commonly known, meant looking for growth at reasonable prices. This is still a great strategy and it makes sense to try and find these kind of stocks in the small cap asset class. After all, smaller stocks still have room to grow.
The following stocks were selected primarily for PEG ratio under 1, but also for a reasonable PE and Price to Book ratios. Additionally, we looked for the past 5 years of EPS growth in the top 40% of their respective industries. Even if the growth slows in the subsequent years, reasonable valuations should provide good downside risk protection.
1. Omega Protein Corp (OME Profile/Quotes): This company processes and sales fish meal, oil and other soluble products derived from menhaden, a herring like species of fish. The products are sold as feed ingredients to various pets and livestock meal products, as well as fertilizers. The stock has a PE of 7.7 and trades at 0.7 times the book value. 5 yr EPS growth has averaged 57%.
2. DFC Global Corp (DLLR Profile/Quotes): DFC is a check cashing and other banking service provider to the consumers who typically do not or cannot be served through regular banks. Yep, they have been doing great business through the great recession. 10.2 PE ratio looks very reasonable and for a service company, a 1.46 price to book multiple is not bad either. The company has grown its EPS at around 46% in the last 5 years. It is any one’s guess how long the growth will last, but the stock can certainly be a good hedge if you worry about economic conditions worsening.
3. Orbital Sciences Corp. (ORB Profile/Quotes): A company full of rocket scientists . They make small rockets and space systems for government, civilian and commercial uses. The stock has traded as high as $45/share in its hey day, but since has been earth bound. It can be bought today at 11 times earnings and 1.08 times book. The company has been growing its EPS at the rate of 15% and the pending launch of Antares can give its earnings additional boost in the years to come, so this is definitely worth to keep an eye on.
4. Kadant Inc (KAI Profile/Quotes): Kadant develops, makes and sells processing equipment used in the paper making, processing and recycling industries. With a PEG just under 1, and a PE ratio of 8, the stock is attractive, given that the company has delivered an EPS growth rate of 16% in the last 5 years. The company also has a fairly conservative balance sheet with significant cash.
These stocks command a market valuation between $131 million to $700 million. Even though they are small caps, these are reasonably well established companies with great market position.
Consider these stocks in greater detail to see if they meet your investment criteria and let me know in the comments below if you have a question or would like to add to this list.
These screens do not constitute investment recommendations. They are just a great starting place for further research.