Small-cap value investing has been a market beating strategy over the long-term, despite its struggles in recent years. This approach focuses on smaller companies (typically with market capitalizations between $300 million and $2 billion) that are undervalued relative to their fundamentals. There are several reasons why this strategy has proven effective over time:
- Information inefficiency: Smaller companies are often overlooked by large institutional investors and receive less analyst coverage. This can create opportunities for diligent investors to uncover undervalued gems.
- Greater growth potential: Small companies have more room to grow and can be more nimble in adapting to changing market conditions compared to large, established corporations.
- Value premium: Research has consistently demonstrated that value stocks (those trading at low multiples of earnings, book value, or other fundamental metrics) tend to outperform growth stocks over time.
Validea’s Approach to Small-Cap Value
Validea’s stock screening and rating system is based on the strategies of legendary investors and academic research. By combining multiple fundamental factors and value metrics, Validea aims to identify high-quality small-cap value stocks with strong potential for outperformance.
Let’s examine five small-cap value stocks that currently score highly in Validea’s models:
1. Olympic Steel Inc (NASDAQ: ZEUS)
Olympic Steel scores exceptionally well on several of Validea’s guru-inspired models:
- Kenneth Fisher Price/Sales Investor: 90% score
- James O’Shaughnessy Value Composite: 92% score
- Peter Lynch P/E/Growth Investor: 93% score
- Benjamin Graham Value Investor: 86% score
ZEUS’s extremely low P/S ratio of 0.22 is particularly attractive to the Fisher-based model, while its combination of low valuation ratios and strong growth rate appeal to the Lynch and O’Shaughnessy models. The Graham-inspired model favors ZEUS’s strong balance sheet metrics and moderate P/E ratio.
2. Ramaco Resources Inc (NASDAQ: METC)
Ramaco Resources stands out in several of Validea’s models:
- Dashan Huang Twin Momentum: 94% score
- Kenneth Fisher Price/Sales Investor: 90% score
- Peter Lynch P/E/Growth Investor: 93% score
- Tobias Carlisle Acquirer’s Multiple: 89% score
METC’s strong price momentum (65% return over 12 months) contributes to its high Twin Momentum score. Its low P/E ratio combined with solid earnings growth results in a favorable PEG ratio for the Lynch model. The low valuation ratios also appeal to the Fisher and Carlisle-inspired models.
Terex receives high scores from several Validea models:
- Kenneth Fisher Price/Sales Investor: 100% score
- James O’Shaughnessy Value Composite: 92% score
- Tobias Carlisle Acquirer’s Multiple: 94% score
- Joel Greenblatt Earnings Yield: 80% score
TEX’s perfect score on the Fisher model is driven by its low P/S ratio of 0.58. The O’Shaughnessy and Carlisle models favor TEX’s combination of low valuation ratios across multiple metrics. The Greenblatt model appreciates TEX’s high earnings yield relative to its quality metrics.
Visteon scores highly on multiple Validea models:
- Kenneth Fisher Price/Sales Investor: 100% score
- Peter Lynch P/E/Growth Investor: 93% score
- Martin Zweig Growth Investor: 77% score
- James O’Shaughnessy Value Composite: 78% score
VC’s perfect score on the Fisher model is due to its low P/S ratio of 0.71. The Lynch model favors VC’s low PEG ratio, resulting from a low P/E and high earnings growth rate. Zweig’s growth model appreciates VC’s strong and accelerating earnings growth, while the O’Shaughnessy model likes its overall value characteristics.
5. Ingles Markets, Incorporated (NASDAQ: IMKTA)
Ingles Markets receives top scores from several Validea models:
- Benjamin Graham Value Investor: 100% score
- Kenneth Fisher Price/Sales Investor: 90% score
- Peter Lynch P/E/Growth Investor: 93% score
- James O’Shaughnessy Value Composite: 100% score
IMKTA’s perfect score on the Graham model is due to its strong balance sheet, low P/E, and low P/B ratios. The Fisher model favors its extremely low P/S ratio of 0.24. Lynch’s model appreciates IMKTA’s low PEG ratio, while the O’Shaughnessy model ranks it highly across multiple value metrics.
Small-cap value investing can be a powerful strategy for investors seeking market-beating returns. By focusing on smaller, undervalued companies with strong fundamentals, investors can potentially capitalize on information inefficiencies and the historically proven value effect. The five stocks highlighted here – ZEUS, METC, TEX, VC, and IMKTA – all display attractive characteristics across multiple Validea models, suggesting they may be worthy of further research for value-oriented investors.
Further Research
