In the filter created this week for The Globe and Mail, we screened for U.S and ADR small-cap growth stocks trading at a discount by using the following criteria:
· A market capitalization between US$250-million and US$2-billion;
· A future-growth-value-to-market-value (FGV/MV) ratio between minus 70 per cent and zero per cent. Since we are looking for discounted stocks, we are searching for a negative FGV/MV, as this translates into an undervalued stock. (This metric represents the proportion of the market value of the company that is made up of future growth expectations, rather than the actual profit generated.) A negative value indicates that the market hasn’t reacted and thus the price has not taken in the improved performance yet.
· An economic performance index (EPI) greater than or equal to one. The EPI is the ratio of return on capital to cost of capital. It gives shareholders an idea of how much return the company is generating on each dollar spent;
· Annual return on capital greater than 5 per cent, reported as of last quarter’s end;
· Return on capital 12-month spread greater than zero;
· Positive 12-month sales change;
· Positive 12-month stock-price change.