Panning for Small- and Mid-Cap Gold
It often reveals companies that are a couple of cuts above some of the deep value techniques I utilize, in terms of quality. This particular screen combines the quest for companies with solid net profit margins, and growing, sustainable dividends.
More specifically, it includes the following criteria:
- Market capitalization between $100 million and $5 billion.
- Net profit margin of at least 8% for the trailing 12 months and for the latest fiscal year.
- Dividend yield greater than 1%.
- At least four consecutive years of increasing dividends.
- Payout ratio less than 50%.
- Price-to-earnings ratio less than 20.
- No financial stocks.
When I ran the screen this past May, only seven names made the cut: Lancaster Colony (LANC) , Carbo Ceramics (CRR) , Hillenbrand, W&T Offshore (WTI) , Sturm Ruger (RGR) , American States Water (WTR) and McGrath RentCorp (MGRC) . Combined, these seven names are up an average of a bit more than 13% in the past six months. That's significantly better return than both the S&P Small Cap Index (up 6.2%) and the S&P Mid Cap Index (up 5.53%).
Although I think this screen has some merit, a six-month time frame is too short to make a judgment. I've seen screens produce great results in the short term but fall apart longer term, and vice versa.