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The long-predicted rotation out of small-cap stocks and into more defensive blue-chip names finally began to unfold in July amid signs the economy was at risk from the spreading credit crunch.
While stocks of every size took a beating in late summer, the smallest of the small stocks were the most bruised in the weeks after the stock market peaked on July 19, according to Lipper, which tracks mutual fund performance.
Then along came Ben Bernanke and his Fed colleagues, who aggressively moved to shore up the economy with a half-percentage-point cut in interest rates on Sept. 18.
The Fed's move eased much of the market volatility that had been driving investors away from the risks associated with smaller companies.
Finding smaller companies whose shares are bargains now and that offer investors the potential to notch significant returns is the aim of a stock screen created by columnist Harry Domash using MSN Money's Deluxe Screener.
Making the grade
Among the stocks the screen turned up is Health Grades (HGRD, news, msgs), a Golden, Colo., company that takes the health-care industry to school. It produces report cards on physicians, hospitals, nursing homes and other health-care providers, and sells the information to employers, insurance companies, health plans and consumers.Families can get some of this information for free on the company's Web site, including the medical training received by doctors as well as recent disciplinary actions. Other data can help families identify the hospitals best equipped to handle a medical emergency that might arise.
Health Grades has a market cap of $177 million. Its shares are down 10% over the past three months.
Here is the complete list of stocks uncovered by the screen.
| Company | Industry | Price-to-sales ratio | Sept. 27 opening price |
|---|---|---|---|
Semiconductors | 0.97 | $3.95 | |
Health-care ratings | 5.19 | $5.90 | |
Semiconductor equipment | 1.44 | $8.80 | |
Biotech | 3.16 | $9.06 |
3 more that shine
ViroPharma (VPHM, news, msgs) discovers drugs to combat infectious diseases. Its principal product is Vancocin, an antibiotic it acquired from Eli Lilly (LLY, news, msgs). It is developing Maribavir, which it acquired from GlaxoSmithKline (GSK, news, msgs) and is in Phase III clinical trials, for patients diagnosed with cytomegalovirus disease after a kidney transplant.The Exton, Pa., company also has a treatment for hepatitis C in Phase II trials. The experimental drug, HCV-796, received fast-track status from the Food and Drug Administration in June.
ViroPharma's market cap is $638 million. The stock is down 36% over the past three months.
Mattson Technology (MTSN, news, msgs) makes equipment used in the manufacture of semiconductors. Mattson produces systems that deposit insulating and conductive films onto silicon wafers, etch patterns onto wafers and remove residues from a wafer in preparation for the next processing step. Mattson has a market cap of $451 million. The stock is down more than 13% over the past three months.
The Fed's interest-rate cut could revive private-equity activity in the semiconductor sector. The highly cyclical chip sector had traditionally been spurned by private-equity firms, which tend to favor more stable companies with reliable cash flows. But the availability of cheap debt encouraged private-equity firms to seek deals in the industry.
Private equity has also been gravitating toward makers of liquid crystal displays, lured by a brightening economic picture after two sluggish years marked by excess inventories.
Himax Technologies (HIMX, news, msgs) supplies microchips used as components of flat-panel displays. The Taiwanese company makes drivers and timing controllers found in the displays of various consumer electronics, including notebook computers, televisions, cell phones DVD players, vehicle navigation systems and video cameras. It has a market cap of $792 million. The stock is down 29% over the past three months.
The standards
Domash established the following screening parameters:- The previous day's closing price must be less than $9.95 a share.
- The previous day's close must be above $2, a floor that reduces risk.
- The previous quarter's average daily trading volume must be at least 40,000 shares, to weed out dead or rarely traded stocks.
- The return on invested capital must be at least 10%, to isolate companies with profits sufficient to support growth or reward shareholders.
- Price-to-sales ratio must be at eight or less.
- Companies must show year-over-year revenue growth of at least 12% over the past 12 months.
- Revenue growth in the previous quarter must be at least 75% of the growth rate for the previous 12 months.
- Forecasted earnings-per-share growth over five years must be at least 15%.
- Institutional investors must hold at least 30% of outstanding shares.
- Mean recommendation by analysts must be "hold," "buy" or "strong buy."
- Companies cannot have had a negative earnings surprise in their recent past.
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