10 Microcap Value Stocks

On a monthly basis I conduct a close replication of AAII's (American Association of Individual Investors) "Shadow Stock" screen. The goal is to find small, undervalued stocks with high price momentum over the past 52 weeks. It is a highly speculative, risky strategy that can potentially undercover a hidden gem or two.

The screen and date below is courtesy of Stockscreen123. I use the following screen criteria to identify high momentum value stocks, which closely replicate the AAII Shadow Stock screen:

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

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The results for this month are at the bottom of the article and last month's list is here. The screen for last month returned -16.67%, versus -15.49%. Given that many of the stocks on the list are relatively illiquid, real results will differ.

In June I discussed in-depth the difficulty in valuing some Chinese stocks. The Chinese companies under the most scrutiny are those which began trading in the US via reverse mergers, which is the practice of a private company acquiring a public company (many times penny stocks which have little or no value) in order to bypass the lengthy and expensive process of going public. Allegations (and in some cases proof) of accounting fraud have plagued the Chinese small-cap sector, especially those companies which began trading via reverse mergers. The non-Chinese firms still warrant additional due diligence, as all of these stocks have low market caps and often have very low volume.

Cobra Electronics (COBR) was featured in-depth last month, when I noted support was at $3-$3.25 and resistance at $4-$4.25. The stock hit resistance at the end of July, shortly after earnings. The stock has sold off hard since then with the overall equity market. The market reacted well to the stock's earnings which were announced July 29th. The company reported $.08/share net income for the quarter. Sales for the quarter increased from $25.7 million to $28.9 million and gross margins increased from 26.5% to 28.4%. The company offered no specific guidance but stated that they "anticipate higher profitability in 2011".

COBR expects profitability in 2011 and trades at a price/book of .63 and price/sales of .18. My concern with such a small company (market cap of $21 million), is that there is a lack of liquidity and the stock has a high beta at a time when the overall market has shown signs of weakness. Thus, investors could be left holding the bag if the market continues to struggle.

Daily chart courtesy of Finviz

Rocky Brands (RCKY) is another name that has traded down significantly along with overall equity market after it announced earnings July 26th. The company increased earnings despite lower sales due to a decrease in sales under military contracts. The stock currently trades at a forward P/E of 6.26, a price/book of .74, and has a strong balance sheet with a current ratio of 6.63. It has increased earnings for 8 consecutive quarters on a year over year basis. It could be a name to watch as well if the market continues to drag it further (daily chart):

The rest of the names on the list:

Ticker	Name	Market Update	Rank	MktCap	Pr2SalesTTM	Pr2BookQ
GFN	General Finance Corporation	Here	99.31	71.32	0.41	0.65
FFHL	Fuwei Films (Holdings) Co., Ltd	Here	98.05	32.21	0.35	0.36
ROIAK	Radio One, Inc.	Here	97.52	61.13	0.2	0.65
SURW	SureWest Communications	Here	96.21	165.14	0.68	0.61
COBR	Cobra Electronics Corporation	Here	94.7	21.45	0.19	0.64
UWN	Nevada Gold & Casinos	Here	94.48	21.88	0.46	0.72
TIII	Tii Network Technologies, Inc.	Here	92.66	30.54	0.49	0.73
RCKY	Rocky Brands, Inc.	Here	89.3	82.24	0.33	0.76
SKH	Skilled Healthcare Group, Inc.	Here	88.58	178.31	0.21	0.59
TGX	Theragenics Corporation	Here	85.65	54.36	0.66	0.66

Disclaimer: No current positions in stocks mentioned. Please note that Scott's Investments is not a financial adviser. Please consult your own investment adviser and do your own due diligence before making any investment decisions. Please read the full disclaimer at the bottom of Scott's Investments.

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