Investors who focus on value are looking for bargains. Stocks where the price has been punished more than the fundamentals warrant and therefore stand a good chance of a turnaround.
One area of the market to explore for stocks that might demonstrate strong returns if they are truly downtrodden for no good reason is the small end of the market.
With that in mind I set about building a screen that focuses on tiny stocks with strong value characteristics and reasonable fundamentals.
The first steps were to focus on small and good value. For this I chose a market capitalisation of less than A$200 million, which is the common threshold for micro-cap stocks. You may choose to make that threshold even lower if you want to zero in on the bottom of the market. The logic here is that this part of the market is often overlooked. It is too small for most fund managers to be interested in, and very few market analysts cover stocks in this space. There are 1,304 stocks in this space, about 65% of the market. Such a large group is likely to hold some interesting opportunities, but finding them may not be easy. They may also be very illiquid so getting in and out can be tricky, especially if you want to invest a meaningful amount.
The next step of the process is to look for bargains. Stocks that are trading below their intrinsic worth. There are many different value metrics that can be considered, but the simplest place to start is by specifying a Value rank of 80 or above. This immediately knocks the list down to 233. This is 18% of the micro-cap universe, or less than the implied 20% which means that proportionally there are more value stocks amongst the larger cap stocks.
It is important to note that the Value rank is derived from a number of different value metrics. If some of those metrics are unable to be calculated then they are excluded from the derivation of the rank. In practice, a number of stocks in this group are not profitable. Therefore the PE ratio cannot be calculated, so the Value rank focuses on other metrics including price to equity, price to tangible equity and price to sales. With this in mind I have added the criteria Price to book value < 1.…
