10 Small Cap Value Stocks With Big Potential

I am a member of AAII (American Association of Individual Investors) and one of their more popular screens is the Shadow Stock Screen. I conduct a close replication of this screen on a monthly basis. This is a very simple screen that seeks out small/microcap value stocks. The screen criteria I use within stockscreen123 are:

No over-the-counter stocks

No financial stocks

Market cap > $20 Million and < $200 million

Previous EBITDA quarter and trailing twelve months are positive

Share price > $1

Price/book < .80

Price/sales < 1.2

Top 10 stocks are selected based on highest 52 week returns

Minimum average daily volume > 5k shares

This is the ninth month of performing the screen. Last month's results averaged 12.29% for the 10 stocks, led by Silverleaf Resorts' (SVLF) return of over 38% in 4 weeks and Fuwei Films (FFHL) 34% 4 week return (returns are hypothetical and exclude commissions and taxes). The previous month this strategy returned 8.77% led by FFHL's incredible 72.76% for the month. FFHL is headquarter in China and develops and manufactures plastic film. A strong earnings report in mid-November has helped spurred the strong returns.

The strategy tends to be high beta - it performs very well in bullish markets and may underperform in bear markets. You can see on the 5 year return chart below that the screen struggled most in 2008 along with the rest of the market (returns on the charts assume .5% slippage but do not account for commissions or taxes; however, free trades are always one option to avoid commissions). I said previously that this is not a strategy I am investing in but it can lead to some under the radar investment ideas with additional due diligence.

One option is to abandon this type of strategy or move to cash when an underlying index such as the Russell 2000 is trading below a long term moving average such as the 200 day moving average. Currently the Russell 2000 is above its 200 day moving average. Another consideration is to hedge the strategy by shorting a small cap ETF or purchasing an inverse small cap ETF. Given that the market rally is beginning to look a little tired as of last week, now may be a time to consider a hedge if also considering a high beta strategy such as this one.

The current top 10 stocks are also below. FFHL tops this months list for the second consecutive month. I update the screen once per month on my site and track the results for free on the right hand side of the site. Full results for all months can be viewed on the right side of Scott's Investments under "Micro Value Screen". The tool used for the screen is stockscreen123. No positions in stocks mentioned

Ticker	Name	Trend	SS123 Rank	MktCap	Pr2SalesTTM	Pr2BookQ
FFHL	Fuwei Films (Holdings) Co., L	Here	99.7	61.28	0.98	0.77
ESCA	Escalade, Inc.	Here	96.77	68.41	0.58	0.79
IMOS	ChipMOS Technologies (Bermuda	Here	95.69	180.11	0.32	0.56
COBR	Cobra Electronics Corporation	Here	94.24	20.38	0.19	0.63
GFN	General Finance Corporation	Here	93.19	57.23	0.35	0.53
SVLF	Silverleaf Resorts, Inc.	Here	89.63	52.88	0.24	0.26
JAX	J. Alexander's Corporation	Here	85.32	32.44	0.22	0.68
TGX	Theragenics Corporation	Here	70.6	58.53	0.73	0.73
DFR	Deerfield Capital Corp.	Here	69.67	68.21	0.53	0.17
RCKY	Rocky Brands, Inc.	Here	68.8	80.99	0.33	0.8