Stock Screen: Small-Cap Momentum Plays

S&P's newest list finds 27 names that score well in terms of relative strength—and earn top ratings from its analysts

From Standard & Poor's Equity Research

From Standard & Poor's investing newsletter The Outlook

In the recent market turbulence, small-cap stocks, as a group, were harder hit than their larger-cap brethren, as investors sought the safety of the bigger names. But Standard & Poor's maintains small-cap stocks should belong in a well-diversified portfolio.

To that end, S&P's investing newsletter The Outlook screened for small-cap stocks with investment rankings of 4 STARS (buy) or 5 STARS (stong buy) from S&P equity analysts that land in the top half of S&P's equity universe when sorted by relative strength. That's a measure of a stock's momentum—how it performs relative to the broader market over 4-week, 13-week, and 52-week periods. Savvy investors know to watch momentum for clues to stocks that are moving up and have the characteristics to realize further upside.

All the stocks that made the cut are in the table below. Here we spotlight three of the names:

Benchmark Electronics

This provider of electronics manufacturing services took in 58% of its 2006 sales from computers and related products, with the remainder coming from medical devices (13%), telecom equipment (12%), industrial control equipment (11%), and testing and measurement equipment (6%). We believe Sun Microsystems (JAVA) and EMC (EMC) together will represent more than 30% of Benchmark's (BHE) sales in the near term.

We expect Benchmark to outperform peers in a narrow-margin industry through its increasing focus on nontraditional markets, such as medical equipment, where it can exploit special expertise. The company typically carries no long-term debt, although it added some as a result of the January, 2007, acquisition of Pemstar, which provides outsourced engineering and design.

We expect Benchmark's overall revenue to rise 6% in 2007 and 11% in 2008. The operating margin should widen toward 5% in 2008, given the higher volumes we project. We estimate earnings of $1.63 a share for 2007 and $1.94 for 2008. Our 12-month target price of $31 applies a price-to-earnings ratio (p-e) of 17, which is near the midpoint of a five-year historical range, to our forward 12-month earnings estimate of $1.80.

Risks to our recommendation and target price include the loss of a major customer, delays associated with the implementation of new program wins, and problems with inventory management.

Manitowoc

We see revenues rising more than 30% in 2007, followed by a gain of about 15% in 2008. We look for the increases to come almost entirely from Manitowoc's (MTW) principal crane division, which we believe will benefit from healthy demand in foreign markets, expected ongoing strength in U.S. commercial construction activity, increased global distribution efforts, and new product introductions.

We expect the operating margin to expand in both 2007 and 2008, on the solid demand that we see for Manitowoc's cranes combined with the likely incremental benefits of previously implemented cost reductions. Our per-share earnings estimates are $2.48 for 2007 and $3 for 2008.

Manitowoc trades at about 13 times our 2008 estimate. That's in the middle of its typical range for the midpoint of business upturns, which is where we think we are. Based on the robust level of profit growth from the company in recent periods and our outlook for continued strong gains, we believe a valuation closer to the higher end of the company's traditional mid-cycle range is appropriate. Applying a p-e multiple of 17 to our 2008 forecast implies a value of $51, which is our target price.

Risks to our recommendation and target price include weakness in the global economy, which could lead to a downturn in commercial construction markets.