CHICAGO, July 29, 2011 /PRNewswire/ -- Zacks Investment
Research presents their newest list of stocks featured in their
weekly Equity Market Anomalies, which describe how to profit from
stock market opportunities. The stocks in this article focus
on the profitable Small Cap anomaly. Stocks include: Mitcham
Industries Inc. (MIND), Newport Corp. (NEWP), Susser
Holdings Corporation (SUSS), Neenah Paper Inc. (NP) and
Town Sports International Holdings Inc. (CLUB).
(Logo: http://photos.prnewswire.com/prnh/20101027/ZIRLOGO)
Learn more about equity anomalies at this site:
http://hema.zacks.com/
Here are highlights from our most recent Equity Market
Anomalies feature:
Small versus Large Cap
The equity market anomaly website hema.zacks.com provides a
comprehensive explanation of numerous stock market anomalies and
details on how and why they are profitable. In this article
we will focus on the effects of the size anomaly. There's a
long standing debate about whether Small Capitalization stocks
outperform Large Cap stocks and that's the essence of the size
anomaly. Does Small really outperform Large over the long
run? By how much? Is Small or Large Cap currently in
vogue?
First, let's define Small and Large Cap. Since there's no
official definition about cutoff values, let's take a simple
approach and label Small Cap as those stocks with a current market
cap of $100 million to $1 billion and
Large Cap as those stocks over $10
billion. Anything between $1
billion and $10 billion would be considered Mid Cap and
those below $100 million are Micro
Cap. These definitions are in current US dollar values and,
in order to perform historical backtests, need to be adjusted for
inflation and market changes. So to account for these
adjustments, we will convert the hard-dollar definitions to
percentiles. The market cap dollar values equate to the top
10% of companies for Large Cap and those that lie in the 30-55%
range for Small Cap.
Next let's use Research Wizard to run some tests to view the
performance of both Small and Large Cap stocks. The test
period will start on January 1, 2000
and end on July 15, 2011. The
results over those 11+ years indicate a tendency for Small stocks
to outperform Large by an annualized average of 12.1%. Small
Cap had an annualized return of 16.3%, versus 4.2% for Large Cap.
These results show that the Small Cap anomaly does exist over
the long term. However, the market frequently changes its
preferred style. The Large trend lasts on average 6.9 weeks
and the Small streak lasts slightly longer at about 8.1 weeks.
Even though the duration of each size is quite similar, the
power of the stay is dramatically different. When Small comes
into favor, it generates an average of 7.8% during those 8.1 weeks.
Conversely, Large returns an average of 4.5% over 6.9 weeks.
So even though the wind blows in each direction about the
same length of time, the Small wind is much stronger than the Large
wind.
So which direction is the wind blowing now? For most of
2011, Large Cap stocks have been outperforming. That's not
surprising given the concerns about the economy and the fact that
there is usually a flight to safety (Large Cap stocks are
considered less risky than Small Cap) during times of uncertainty.
When the dark economic clouds start to disperse, however,
Small Cap stocks should come back with a bang.
Here's a method for finding stocks to take advantage of the size
anomaly:
- Start with Small Caps which are defined as market caps above
$100 million and below $1 billion.
- Place a liquidity requirement of average daily volume
greater than or equal to 50,000 shares (if there's not enough
liquidity, it'll be hard for you to trade it).
- Add another filter by selecting those stocks with a Zacks
Rank = 1. (Let's also pick the stocks that are highly
rated.)
Here are 5 great Small Cap stocks (07/27/11):
MIND – Mitcham Industries Inc.
Mitcham Industries sells, leases and services seismic equipment
to oil and gas companies around the world. That's a good
business to be in when fossil fuels are becoming increasingly
scarce. Last week, Mitcham reported record sales and net
income. Earnings estimates have been increasing, analyst
recommendations have been improving and the stock price has been
red hot. The company was also added to the Russell 3000 last
month. Valuation ratios and operating margins also look good.
Inventory is flowing and cash flow is strong. This all
adds up to a pretty sound Buy.
NEWP – Newport Corp.
Newport Corporation develops, manufactures and sells precision
technology products for scientific research, microelectronics,
aerospace, defense, health sciences and industrial manufacturing.
That's a fairly diverse, and growing, set of global
customers. The company also has a good trend of positive
earnings surprises. Analyst earnings estimates and
recommendations have also been improving. Not only does
Newport's Income Statement look good, but its balance sheet does
too. The company also doesn't require large amounts of
capital expenditures to remain competitive. Cash flow looks
pretty good as well. Newport is really as good as it
looks.
SUSS – Susser Holdings Corporation
Susser Holdings Corp operates convenience stores and distributes
motor fuels in Texas and
surrounding states. The company has been indicating that
higher revenue for Q2 should be expected, and stock analysts have
taken note by improving both estimates and recommendations.
Susser has also recently announced a $15 million share repurchase program.
That's about 5% of outstanding stock. Do you think
management feels its stock is underpriced? You bet! The
stock price of this consumer staple company has been doing very
well over the last 18 months. All the corporate financial
statements look good as well.
NP – Neenah Paper Inc.
Neenah Paper produces and sells fine paper products for
corporations including writing paper, letterhead, packaging,
envelopes, and brochures. and technical products including tapes,
labels, wall covering and image transfer papers. Needless to
say the product mix is diverse and so is its worldwide customer
base. The company has been reducing its debt levels and has a
good record of earnings surprises (which has resulted in improving
analyst estimates and recommendations). Profit margins have
remained strong and NP has fairly good Price/Sales and
Price/Earnings ratios.
CLUB – Town Sports International Holdings Inc.
Town Sports International operates fitness clubs in the
Northeast and Mid-Atlantic states. Insiders at this company
have been buying over the last few months and that's usually a good
sign. The stock price has been flying like a falcon on fire
over the last 12 months. The company has been consistently
surprising on earnings and analysts are increasing their estimates
and recommendations as a result. Although the P/E ratio is
about average, the P/S ratio (which is a more predictive measure
anyway: see previous article) looks pretty good.
This study provides evidence of the size anomaly and
demonstrates that Small outperforms Large over the long term.
Yet, remember that many reversals do occur and they are often
determined by economic conditions. The rationale for the size
anomaly's existence over time may lie in investors not fully
realizing the potential earning power of Small Caps and, perhaps,
overpaying for perceived safety. The size anomaly is another
example of the market not being able to properly reflect current
conditions and future expectations in current stock prices.
The size anomaly is just one of many types of investment
anomalies. Other examples might include anomalies based on
analyst data, insider trading and earnings surprises. To
explore the world of stock investing anomalies and profitable
strategies, please visit a website dedicated to their explanation
and discussion: hema.zacks.com. You'll also be able to
interact with the experts. It's definitely worth a visit.
Click here to learn more about this market beating anomaly and
others.
Disclosure: Officers, directors and/or employees of Zacks
Investment Research may own or have sold short securities and/or
hold long and/or short positions in options that are mentioned in
this material. An affiliated investment advisory firm may own or
have sold short securities and/or hold long and/or short positions
in options that are mentioned in this material.
Disclosure: Performance information for Zacks' portfolios and
strategies are available at:
http://www.zacks.com/performance.
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