In a recent Daily Commentary, The Russell 2000 Is Up Against Key Support, we showed how the small-cap index sat on critical technical support. Further, valuations for the Russell 2000 are among the cheapest in 25 years and much cheaper than the larger cap indexes.
Despite what appears to be a good value play, we cautioned:
Lastly, many smaller companies are more indebted and have less access to the capital markets. It is estimated that a quarter to a third of Russell companies pay more in debt costs than they earn. Investors refer to such companies as zombies. Higher rates threaten zombies and other companies with high debt levels. The Russell 2000 is undoubtedly cheap, but do your homework because high amounts of debt and rising rates are a recipe for bankruptcy for some of these companies.
Given our concerns, this week’s scan seeks small-cap companies with cheap valuations, solid growth prospects, and, importantly, very little debt.
Scan Criteria
- Member of the Russell 2000
- Debt to Equity ratio <.20
- P/E <10
- Forward P/E <10
- PEG ratio <1
- P/S <1
- EPS Growth Next 5yr Forecast >10%
Company Summaries
Greenlight Capital (GLRE)
Heidrick & Struggles Intl. (HSII)
Jakks Pacific Inc. (JAKK)
Medifast Inc. (MED)
Richardson Electronics, Ltd. (RELL)
Five for Friday
Five for Friday uses stock screens to produce five stocks that we expect will outperform if a particular investment theme plays out in the future. Investment themes may be relevant to the current or expected market, industry and/or economic trends. Investment themes may not always represent our current forecast.
Disclosure
This report is not a recommendation to buy or sell the named securities. We intend to elicit ideas about stocks meeting specific criteria and investment themes. Please read our disclosures carefully and do your own research before investing.
Michael Lebowitz, CFA is an Investment Analyst and Portfolio Manager for RIA Advisors. specializing in macroeconomic research, valuations, asset allocation, and risk management. RIA Contributing Editor and Research Director. CFA is an Investment Analyst and Portfolio Manager; Co-founder of 720 Global Research.
Follow Michael on Twitter or go to 720global.com for more research and analysis.
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