Following is Part Two of an article from the Small-Cap Informer Newsletter. Part One outlined criteria for a sample small-company growth screen from the BetterInvesting Guide to Computerized Investing and the Internet. Here we look at adding further criteria to screen small-cap stocks.
Now, view your results. You should have plenty of companies to study. If you have too many companies, then you can consider adding some additional criteria, such as:
Stable or increasing return on invested capital. Similar to the PTP Rating described above, set the ROE rating to be greater than 2.
Insider ownership > 15%. This means management’s interest is aligned with shareholders.
Institutional ownership > 10%. Some institutional interest is desirable in order to support share price growth.
You’ll note that there are no valuation metrics included in the above criteria. My preference is to search first for quality companies, then review their valuations independently. If you wish to screen a bit deeper, however, here are some valuation criteria that you could include:
PEG ratio between 0.75 and 1.2.
Relative value between 0.75 and 1.2.
These won’t eliminate overvalued stocks completely, but they will isolate companies that may be closer to an attractive current buy price.
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