10 Small Cap Stocks With Earnings Surprises

Below is a list of 10 small cap stocks with recent earnings surprises to consider in the short (or long) term. For the purpose of this monthly list, I define value as a stock with a projected current year PE of under 20 and a Price to Earnings growth ratio under 1.  Small cap is defined as having a market capitalization under $1 billion.  The earnings surprises  are defined as stocks which have beaten estimates the past 2 quarters and have an average earnings surprise of 20% or more for the past 4 quarters. I also require stocks to be trading above their 200 day simple moving average.  I use  stockscreen123 as the tool and screener.

Last month's portfolio can be seen here. Last month the list performed poorly, returning -11.60% (excluding any dividends) versus -3.67% for SPY and -3.93% for VBR, a small cap value ETF.  As I've stated in the past this is a "risk-on, risk-off" trade.  Even before the disaster in Japan, equity investors recently began taking profits.  As investors take the risk off the table, screens such as this one may suffer.

Why do I track this screen? I find PEG an effective ratio for identifying growth stocks at a reasonable value.  In addition, a recent history of earnings increases could, in theory, help identify companies with the ability to continue to surprise.  Backtesting this screen with a rebalance period of every 4 weeks and a maximum position size of 10% (in instances where less than 10 companies qualify) has produced solid 5, 3, and 1 year returns (see December's list for a backtest).  A quick visual inspection shows this screen has done well as a high beta play - outperforming in positive market environments and struggling in down markets.  Also, a 4 week rebalance period can lead to high turnover and transaction costs.