What are we looking for?
Small cap companies trading in the United States that have a low level of institutional ownership, moderate analyst coverage and are expected to experience positive analyst sentiment in the future.
Small cap stocks can be considered risky for some individual investors due to the volatile nature of how these stocks trade. Since trading volume is usually low for these companies, volatility can be driven by institutions that are looking to buy or sell the stock in large blocks and sudden changes in analyst recommendations.
The screen begins by identifying companies trading in the United States with a market capitalization between $250-million (U.S.) and $1-billion that have institutional ownership of at most 30 per cent. Institutional ownership, also known as the "smart money," is a dynamic that can negatively or positively affect a stock's price. When a large percentage of the shares outstanding is owned by institutions, liquidation of these large positions can cause stock prices to drop dramatically – especially given the low volume nature of small cap stocks. Alternatively, institutions looking to build up positions will positively affect the stock price.
The next filter incorporates analyst coverage and expected change in sentiment. We're looking for stocks that have between two and 10 analysts covering the stock, and have an Analyst Revision Model score above the 80th percentile. This proprietary StarMine model is designed to predict future analyst sentiment by using our Smart Estimates, which overweight more accurate analysts and most recent revisions to provide a more accurate estimate of financial variables in multiple time periods. Our research has shown that past revisions are highly predictive of future revisions, which in turn are highly correlated to stock price movements. Higher scores reflect more positive sentiment.
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What did we find?
The results identified 16 companies in the United States that meet the screen criteria. FuelCell Energy Inc., an integrated fuel cell company involved in clean energy, is listed as a strong buy and has four analysts covering the stock. The stock's Analyst Revisions Model score of 93 is one of the highest on the list largely because of an increase in the estimate for revenue in 2016 and recent upgrades in the past couple of months.
This commentary does not provide individualized advice or recommendations for any specific subscriber or portfolio. Investors should conduct further research before investing.
Patrick Gattuso works in the financial and risk unit of Thomson Reuters and specializes in asset management.