10 Small Cap Stocks With Positive 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 outperformed at 3.48% (excluding any dividends) versus -.07% for SPY and -.21% for VBR, a small cap value ETF. Last months returned were bolstered by Amtech Systems (ASYS) at 18.64%, SciClone Pharmaceuticals (SCLN) at 18.11% and Richardson Electronics (RELL) at 15.55%. One stock on the list was a drag on the entire portfolio, China Valves Technology (CVVT) at -32.28%. Using a stop loss with positions could potentially prevent a substantial loss of this size.

I exclude OTC stocks and I further narrow the list based on additional stockscreen123 fundamental factors to 10 stocks or less. The list, as always, is not a specific portfolio but a recommendation for further research. Since this is a purely mechanical screen, I play no discretion in the results (other than establishing the original screen criteria). Of note, MDF has been a qualifying stock on this list since May. I continue to watch it for potential price breakouts but have yet to see a significant breakout. After struggling to break strongly above the $4.50 level, it broke above this level last month only to find significant resistants at $4.80 (chart courtesy of Finviz):

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 last month 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 which can be neutralized by free trades.

This month's list consists of the following 10 stocks:

Ticker	Name	Trend	SS123 Rank	MktCap	Industry
MDF	Metropolitan Health Networks,	Here	99.17	193.75	Healthcare Facilities
NSIT	Insight Enterprises, Inc.	Here	99.14	694.11	Computer Hardware
SCLN	SciClone Pharmaceuticals, Inc	Here	98.29	208.9	Biotechnology & Drugs
GLDD	Great Lakes Dredge & Dock Cor	Here	98.14	499.13	Construction Services
DDIC	DDi Corp.	Here	98.07	239.62	Electronic Instr. & Controls
ASYS	Amtech Systems, Inc.	Here	97.76	251.54	Semiconductors
MOH	Molina Healthcare, Inc.	Here	97.19	917.45	Insurance (Accident & Health)
HITK	Hi-Tech Pharmacal Co.	Here	93.31	310.97	Biotechnology & Drugs
IRBT	iRobot Corporation	Here	91.77	665.17	Appliance & Tool
RUSHA	Rush Enterprises, Inc.	Here	91.68	720.19	Auto & Truck Manufacturers