AB Analytical Services

Small-Caps, Big Dividends, High Insider Ownership

There is a lot of focus these days on stocks with high dividends, and rightly so considering the alternatives. Many investors seeking high-yielding stocks limit themselves to larger, well-known companies in the belief that they are somehow "safer" than smaller companies. It would seem that the experiences of 2008 and 2009 would negate that preference - anyone remember the high yields of the banks and companies like GE? There are many metrics we can use to minimize the risk of getting our dividends slashed, including strong balance sheets and low payout ratios. Another one that I like to see is high inside ownership, as "principals" are less likely to cut the dividend (and to pull cash out of their own wallets) than "agents". With that in mind, I ran a screen of smaller companies with positive attributes.

 

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Joplin Tornado Blows Away This Company's Dividend

 

Empire District Electric Company (EDE) is yet another victim of the horrific devastation from the tornado in Joplin this past weekend. The stock had initially declined modestly earlier this week, but it plunged yesterday by 15%, wiping out $125mm in market value after the company suspended its dividend for two quarters. The company cited 8-10k customers that will be out of service for the forseeable future that will result in 10-15% loss of revenue and damage repair of $20-$30mm before potential insurance recoveries.

 

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7 Dirt-Cheap Small-Caps that are Growing

The sharp retreat in certain parts of the market over the past few weeks has been very cruel to micro caps. According to Russell data, their Micro Cap Index, which consists of the bottom 1000 names in the Russell 2000 in terms of market cap as well as the next 1000 names, is down 5.17% in May, which is sharply lower than the return on the S&P 500 of 2.06%.

The Russell 2000 index of small caps is down 4.13%, suggesting that the smaller the stock, the worse it is getting hit. Why? I believe that a couple of things are going on, including a flight to quality/liquidity, which is reflected in the strengthening dollar, rallying Treasuries and the strong performance of certain sectors like Utilities and Healthcare, and relative pessimism among smaller investors who typically have more impact on smaller stocks than larger ones.

With this in mind, I wanted to design a screen to identify dirt-cheap smaller companies. Here is what I did (and why):

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5 Apparel Companies with Good Fundamentals, Low Valuation and Strong Price Momentum

With gasoline prices finally in reverse, attention may shift to the Consumer Discretionary sector. The quarter has seen a big shift into the sector, with the S&P 500 (SPY) Consumer Discretionary stocks up 2.4% compared with the S&P 500, up just 0.3%. The performance is even better for smaller Consumer Discretionary Stocks. With less demands on the wallet for filling up the tank, I expect that some discretionary spending may materialize at the mall. In order to identify some potential names to consider, I ran a screen designed to identify positive price momentum as well as strong fundamentals and good valuation among companies that make or sell clothes. Here are the parameters I used:

• YTD Price Return > 10%
• PE F12M < 14
• Net Debt to Cap < 25%
• Estimate Revisions - Past 3 Months > 0

Five companies made the cut.

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Lots of Cheap Blue-Chips

More than 7 months ago, I laid out what seemed like a long-shot call but now is looking very likely: 1500 on the S&P 500 in 2011. The premise of my argument was that the S&P 500 would likely benefit from earnings growth and a little bit of multiple expansion. Earnings projections for 2011 have held up and earnings are headed to a record level.

To me, the question has now become: When will we take out the all-time high on the S&P 500 (1576)? The NASDAQ has already moved past its 2007 high, as has the Russell 2000. It seems to me that we are likely to achieve 1600 at some point in 2012.

To get a little more confidence in my outlook, I decided to screen the S&P 500 to find companies that are already printing record earnings but have yet to reach their recent pre-crash peaks.  I ended up with a nice list of blue-chips that are below their old highs but earning more than ever. 45 have yet to take out their old highs, but these seem very likely to do so in the coming months and quarters.

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Energy's Thrashing: A Healthy Dynamic

Energy has collapsed, giving up 6% so far this quarter, while Healthcare is up 7%. Year-to-date, now, Healthcare has surpassed Energy, which is in second place at a not-too-shabby 9.9% compared to Health at about 12.6%. It's worse for Small-Cap Energy, which is down 12% QTD. In early April, I had first warned of my concerns about Energy, suggesting conservative investors move to Large-Cap Technology, which is up about 2% QTD. More recently, I shared my expectation for a 10% correction in Energy. I think we will hit the objective I shared in coming days.

I think that this action is extremely positive for the market, but I recognize that the short-term implications can be negative. Last October, I shared my forecast for 2011, suggesting 1500 on the S&P 500 was in the cards. We are essentially on track, with the S&P 500 up about 7%, 1/3 of the way through the year. Rising energy prices and other commodity prices stand out to me as a real impediment to my forecast being achieved, as they could destroy demand or lead the Fed to be more aggressive with interest-rate policy than would be otherwise warranted.

 

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