By Michael Director Sometimes it pays to think small. While the large-cap Standard & Poor's 500-stock index has slipped 6.2% year-to-date (through Apr. 30), the S&P MidCap 400 index has risen 5.9%, while the S&P SmallCap 600 index has gained 9.8%.
Small- and mid-caps have traditionally been a haven for value investors. But it's worth noting that the valuation gap among these S&P indexes has narrowed. As of Apr. 30, the "400" traded at a price-earings ratio (p-e) of 27.4 while the "600" went for 30.6 times estimated 2002 earnings. Those numbers are in the same valuation neighborhood as the "500", which traded at a near-historic high p-e of 27.7, even after its recent slide.
KEY ELEMENTS. So the trick for investors trawling the small- and mid-cap waters is to find quality companies that are attractively valued. With that in mind, we set out to build our latest stock screen. Drawing from the 1,000 issues in the S&P small- and mid-cap indexes, we looked for companies with solid sales growth (greater than 10% over the past year). The companies had to have posted positive earnings for the past 12 months.
We didn't want to overpay for growth, so we then screened for stocks that were trading well below market p-e multiples --in this case, under 15 times earnings over the past 12 months.
And the stocks had to pass one final test. Each had to have an S&P investment ranking of 4 STARS (accumulate) or 5 STARS (buy), meaning S&P analysts expect them to outperform the broader market over the next 6 months to 12 months.
When we ran the numbers, the following 10 stocks turned up:
Black Box (BBOX)
Compass Bancshares (CBSS)
Indymac Bancorp (NDE)
Ocean Energy (OEI)
Patina Oil & Gas (POG)
Shaw Group (SGR)
XTO Energy (XTO) Director is a portfolio services analyst for Standard & Poor's