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What are we looking for?

U.S.-listed small-cap stocks that look poised to outperform.

Over the long-term, small-cap stocks should outperform their large-cap counterparts since investors demand a higher level of return to justify the higher risk that goes along with owning small caps. However, over the past five years, large-cap stocks making up the S&P 500 have had a nearly identical performance to the small-cap constituents of the Russell 2000 index.

In the past 12 months, small-cap stocks seem to have finally found their footing, delivering a 18.9-per-cent return compared with 13.7 per cent for the S&P 500. An expanding U.S. economy and an environment of decreasing government regulation may further spur growth in this portion of the market.

The screen

We will use Recognia Strategy Builder to screen for small-cap U.S. stocks with a market cap between $300-milllion (U.S.) and $4.3-billion. The upper limit is consistent with the upper threshold of the market cap of companies included in the Russell 2000 index. To ensure we consider only well-valued candidates, we will filter to include only companies with forward price-to-earnings ratios of 20 or less. Given the environment of increasing interest rates, we also look for companies with low debt levels, specifically a debt-to-equity ratio of 1.5 or less.

To focus in on stocks that have already demonstrated strong price momentum, we will select only stocks with a four-week price performance of 5 per cent or more. And last, to further extend the theme of selecting small-cap winners, we will consider only stocks rated "strong buy" by a consensus of industry analysts, according to FactSet.

More about Recognia

Recognia is a global leader in automated quantitative analysis and engagement solutions for retail online brokers and institutions. Recognia's product suite provides actionable trading ideas based on technical and fundamental research covering stocks, ETFs, indexes, forex, options and commodities.

What did we find?

Optoelectronic manufacturer Fabrinet tops our list with both the lowest forward P/E ratio (just 12.8) and the best four-week price performance (up 22.6 per cent). Since early May, the stock has rallied almost 40 per cent based on strong corporate results reported on May 8. Company revenue exceeded analyst estimates in the fiscal third quarter by a wide margin, triggering an immediate 10-per-cent jump in the price of the stock.

Israeli-based integrated circuit manufacturer Tower Semiconductor Ltd. has enjoyed an amazing year with the stock price up 111 per cent in the past 12 months. Despite this strong price appreciation, Tower Semi remains reasonably valued with a forward P/E ratio of just 13.8.

The largest company on our list is BGC Partners Inc., a global brokerage firm serving the financial services and real estate sectors. The company's stock has been on a strong run, up 47 per cent in the past year and 10.2 per cent in the past month. BGC Partners also has a dividend yield of 5.5 per cent, the highest on our list.

The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Recognia Inc. in respect of the investment in financial instruments. Investors should conduct further research before investing.

Peter Ashton is vice-president of retail and self-directed investing at Recognia Inc.

U.S.-listed small caps that appear set to outperform

RankCompanyTickerAnalyst Consensus Rec.Market Cap. ($M)P/E (This Yr's Estim.)D/E Ratio4 Wk Price Performance Dividend Yield
1FabrinetFN-NStrong Buy$1,674.212.80.1222.6%0.0%
2Orbotech Ltd.ORBK-QStrong Buy$1,734.113.80.1111.3%0.0%
3Tower Semiconductor Ltd.TSEM-QStrong Buy$2,663.713.80.4713.7%0.0%
4State National Co.SNC-QStrong Buy$758.315.60.148.8%1.3%
5Perficient Inc.PRFT-QStrong Buy$663.515.10.116.8%0.0%
6The Hackett Group Inc.HCKT-QStrong Buy$475.416.00.098.5%1.8%
7Hooker Furniture Corp.HOFT-QStrong Buy$498.815.60.2313.2%1.1%
8BGC Partners Inc.BGCP-QStrong Buy$3,761.013.61.2510.2%5.5%
9NMI Holdings Inc.NMIH-QStrong Buy$699.316.30.308.3%0.0%
10BofI Holding Inc.BOFI-QStrong Buy$1,550.511.91.318.4%0.0%
11AdvanSix Inc.ASIX-NStrong Buy$1,
12Unifi Inc.UFI-NStrong Buy$539.219.00.386.5%0.0%
13United Community FinclUCFC-QStrong Buy$430.316.91.256.9%1.4%

Source: Recognia