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What are we looking for?

U.S.-listed small-cap stocks with upside price momentum.

U.S. equities pushed to new all-time highs on Wednesday after the U.S. Federal Reserve said it would scale back monthly bond purchases that began during the pandemic, and that the move does not imply a change in interest rate policy. The fact the Fed continues to inject liquidity into the market is good news for stocks. The Russell 2000 Index has lagged behind its larger cousins this year in terms of performance, but on Wednesday the index finally broke above a seven-month consolidation to a new record high. Can small-cap stocks finally catch up to the broad market?

The screen

We will be using Trading Central Strategy Builder to search for U.S.-listed small-capitalization stocks with strong price performance and reasonable valuations.

We will screen for stocks with a market cap between US$2-billion and US$5-billion. For comparison, the Russell 2000 constituents have a weighted average market cap of US$3.8-billion.

To ensure we consider only well-valued candidates, we will filter to include only companies with a price-to-earnings ratio of 25 or less. The average P/E of the larger cap S&P 500 index is currently at 25.8.

To find top performing stocks with upside price momentum, we require:

  • A four-week price performance of 5 per cent or more;
  • The stock price must be within 10 per cent of its 52-week high;
  • The stock must have hit its 52-week high within the past 10 days.

In order to avoid stocks with low liquidity, we added a volume filter. The average number of shares that have traded daily over the past 90 calendar days must be above 400,000.

We have also included dividend yield, as well as year-to-date and one-year price return for your reference.

More about Trading Central

Trading Central is a global leader in financial market research and investment analytics for retail online brokers and institutions. Its product suite provides actionable trading ideas based on technical and fundamental research covering stocks, exchange-traded funds, indexes, forex, options and commodities.

What we found

Seeking value among U.S. small caps trending higher

RankCompanyTickerMkt. Cap. (US$ Bil.)P/E (TTM)4W Price Perf. (%)Chg. from 52W High (%)Days since New 52W HighVol. 90D Avg. (Mil.)YTD Price Perf. (%)1Y Price Perf. (%)Div. Yld. (%)Recent Price (US$)
1Chimera InvestmentCIM-N3.94.68.5-0.101.6159.885.18.116.37
2Hercules Capital Inc.HTGC-N2.16.45.8-2.020.6123.649.37.417.83
3Umpqua HoldingsUMPQ-Q4.810.06.7-0.401.6444.978.13.821.57
4Magnolia Oil & GasMGY-N3.712.17.9-8.461.76186.7388.90.820.83
5Ryder System Inc.R-N4.813.06.4-4.970.5543.372.62.688.53
6Lexington Realty TrustLXP-N4.115.99.0-0.801.8939.644.82.914.74
7BrightSphere Invest.BSIG-N2.48.313.7-1.920.4656.3108.10.129.98
8Gray Television Inc.GTN-N2.46.67.4-0.100.4741.089.91.323.83
9Federated HermesFHI-N3.411.77.4-1.100.4720.338.43.134.69
10Premier Inc.PINC-Q5.018.78.7-1.400.5918.319.11.941.00

Source: Trading Central

Of the 10 companies that made the list, six are in the financial sector.

Topping our list is Chimera Investment Corp., a specialty finance company in the real estate sector. The stock price hit a 52-week high this week. The company has the lowest P/E (4.6) and the highest yield (8.1 per cent) on our list, making it a stock that might attract investors looking for income – as long as they can withstand some price volatility.

BrightSphere Investment Group Inc., an asset management company, has the highest four-week price performance and second-highest one-year price performance on our list at 13.7 per cent and 108 per cent, respectively. The stock has been trending higher, above its 20-week moving average. At the start of this year it broke above a 52-week high of US$18.60 that was set in January, 2018.

Magnolia Oil & Gas Corp. is the only company on our list in the energy sector. The company operates as an oil producer in Texas. Much like BrightSphere, the stock price has been trending higher since June of this year, when it broke above a 52-week high of US$15.25 set in October, 2018. The stock price has gained 186.7 per cent year to date and 388.9 per cent over one year. And despite this impressive price performance, its P/E is sitting at 12.1.

Although small-cap stocks generally come with higher risk, the breakout in the Russell 2000 Index is significant and may put these junior companies back on investors’ radar.

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

Gary Christie is head of North American research at Trading Central in Ottawa.

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