Finding Small-Cap Growth Stocks

[MrPanda]

Hi, I was wondering if there was a methodology to consistently find quality small-cap growth stocks to invest in ? Currently , what I do is use a stock screener like FInviz. in Finviz, for example, I would input certain parameters like (EPS Growth Past 5 years > 25%) + (Sales Growth Past 5 Years >25%) and it would produce a list of stocks that fit these criteria. However, when I input these 2 criteria, I get a list of only 240 stocks. And when I dig further into the financials of these 240 stocks, I find almost zero stocks that would qualify as a quality investment. Usually either they are not profitable, or are overvalued or have low Return on Equity . Wonder why I find it so hard to find quality small cap growth stocks to invest in. Is my methodology wrong? Has anyone tried finding small-cap growth stocks before ? What is your method ? Thanks alot !

[Value_Added]

They certainly exist but quality comes at a price.  The micro and small cap market aren’t as overlooked anymore and anything of quality that’s proven itself and shows up on a screen for high quality metrics, will not come cheap unless there’s an event to make them cheap.  If they’re truly high quality, the current multiple may be okay given a long timeline to continue executing but you’d better have a good understanding before placing that bet because if you’re wrong, multiple contraction paired with falling metrics is an expensive mistake.

[MrPanda]

6 minutes ago, Value_Added said:

They certainly exist but quality comes at a price.  The micro and small cap market aren’t as overlooked anymore and anything of quality that’s proven itself and shows up on a screen for high quality metrics, will not come cheap unless there’s an event to make them cheap.  If they’re truly high quality, the current multiple may be okay given a long timeline to continue executing but you’d better have a good understanding before placing that bet because if you’re wrong, multiple contraction paired with falling metrics is an expensive mistake.

Ok. The problem I am facing now is that I CANT even find a substantial number of small-cap growth stocks to invest in. How do i go about finding them ? Any advice ?

[Value_Added]

I don’t know the screens that finviz offers but I would screen for:

 

• +12% revenue growth
• +12% net income growth
• +12% operating cash growth (use FCF if they have the screen for it)
• +12% equity/book value growth
• ROIC of 12% or higher.
• Market cap <$1B
• Ev no more than 30% above market cap

That should find you a quality company with manageable debt.  Just remember that Covid really hammered these metrics for small businesses in 2020 so I would run your screen starting in 2020 or ending in 2019.  You probably aren’t going to find a lot of +25% early stage growers here because they won’t be able to show profit and operating cash/FCF growth.  This is more of a quality screen.

[MrPanda]

13 minutes ago, Value_Added said:

I don’t know the screens that finviz offers but I would screen for:

 

• +12% revenue growth
• +12% net income growth
• +12% operating cash growth (use FCF if they have the screen for it)
• +12% equity/book value growth
• ROIC of 12% or higher.
• Market cap <$1B
• Ev no more than 30% above market cap

That should find you a quality company with manageable debt.  Just remember that Covid really hammered these metrics for small businesses in 2020 so I would run your screen starting in 2020 or ending in 2019.  You probably aren’t going to find a lot of +25% early stage growers here because they won’t be able to show profit and operating cash/FCF growth.  This is more of a quality screen.

Whats stock screener do you use? I dont think Finviz has the options to screen for those parameters ...

[Value_Added]

Tikr 

 

https://app.tikr.com/register?ref=e2vcqf

[LC]

Try some backwards engineering. 

 

Look at a small cap growth stock which has done really well, and look at the first few years of financials. See what metrics stick out to you and try and replicate that.

[Intelligent_Investor]

Its kinda hard to find cheap growth-ish stocks unless you are willing to back up the truck when megacaps get wrecked for some reason. You could've bought META, GOOGL, and AMZN for $90/share or less just a year ago and Chinese tech can still be had for less than 10x FCF. I've had quite good performance finding low growth, but high quality small to mid caps and buying them dirt cheap. Signet jewelers was trading for around 5x normalized FCF just a few months ago, but they aren't really a growth stock.

[schin]

I find stocks like ARM, NuBank, Coupany, UiPath all IPO as mid to large cap stocks. It's really hard find a small stock that has growth... maybe, they IPO and then drop into a low cap valuation.... but, what's the best small cap anyone has seen lately?

 

I would say... maybe, maybe, Brunello Cucinelli at 5B. 

[WayWardCloud]

VC and PE take their pick and they are both extremely well funded so all that's left in small public stocks are left-overs none of the pros wanted. I believe this is why the long overdue mean revert hasn't happened and might never.

[Kupotea]

6 hours ago, schin said:

I find stocks like ARM, NuBank, Coupany, UiPath all IPO as mid to large cap stocks. It's really hard find a small stock that has growth... maybe, they IPO and then drop into a low cap valuation.... but, what's the best small cap anyone has seen lately?

 

I would say... maybe, maybe, Brunello Cucinelli at 5B. 

North American Construction Group would be my pick. It’s cyclical though and that turns a lot of potential investors off. I think most of the successful consolidators at one point fit the criteria of small cap growth.

[pricingpower]

If you're not following 13F SEC filings closely would absolutely do that first by picking some small cap growth funds that run a concentrated low turnover book and just looking at what they bought each quarter.  Dataroma has some nice curated suggestions.

 

My suspicion is the growth of quant funds has probably made screeners work less well as a filter over recent years.  Places that the accounting doesn't reflect reality well are probably the most interesting (a tech company that fully expenses R&D instead of capitalizing, a retailer that is growing stores which shows an earnings loss while creating value, a manufactured housing co with a lending book etc). The End of Accounting is a good book on the topic of how the rise of intangibles since the 70s have made GAAP accounting steadily less predictive of returns (although not going to give much actionable investing advice).