Previously, I did an article on companies with small market capitalizations. It walked through the background and took a stab at a practical screen for small caps. Small Caps tend to outperform larger caps, so they can give the smaller investor a leg up on the S&P 500.

One of the best ways to improve a search for small caps is to filter the companies down in a less quantitative way. This article does a deeper dive on 5 of the companies that I thought were the most interesting. I started with a list of 200+ smaller caps that were profitable.

Jerash is a clothing manufacture located in Jordan. This one stood out because it has had revenue and book value growing at a 20% clip over the past 5 years. Revenue forecast look flat for 2023, and they may go down if we enter a recessionary period. The company has no debt, so the balance sheet looks really clean. It is trading at 2.5x EV/EBITDA. The PE is currently at 6.5x, and it has historically been in the 7x–15x range. If the earnings are sticky, next year you could see some multiple expansion along with a return to earnings growth in the future.

There is no real moat here. The trade agreement with Jordan allows them to be a low cost operator, but if the deal goes away that advantage could evaporate. A lot of revenue (~60%) comes from a single company (VTF). The percentage has gone down over time as the company grows.

Taylor Devices sells shock and vibration control devices that are used in machinery, equipment, and structures. The company has no debt. It has a nice steady growth in revenue, earnings and book value. It currently trades below book value, and the EV/EBITDA is at x3.25. Margins are improving which is allowing earnings to grow faster than Revenue.

The ROIC is a little on the lower side (~7%). It also has all the risks of a small cap company that you might expect (low liquidity, competitive risk, etc).

Citi Trends is a value retailer of clothing and home goods. It has a relatively quick payback (~2 years) on new stores because they require a very small amount of capital to open up. Being the low cost operator can be a big advantage heading into a potential economic downturn. Its currently trading at just under 4x EV/EBIT and a PE ratio of 3.6. Price to book is at 1.54 times. Insiders seem to agree that “the price is right” with some sizeable open market purchases at the beginning of the month.

The company unfortunately does not have an online presence. They also need to get the fashion trends right or they end up with a bunch of inventory that they can’t sell.

Credit Risk Monitor helps companies manage their credit risk. With an economic recession looming on the horizon, companies wanting help with risk assessment is likely to continue and even increase.

The Revenue is growing at a 5–10% clip and the EV/EBITDA is around 5x. The ROIC is quite high at 47%. The balance sheet looks good with lots of cash available to whether any storms. The risks again are similar to other small caps.

Mastech provides business with remote technology staffing and consulting. The company is on the lower side for multiples within its industry. The ROIC is solid at 14%. It has had good historical growth (>10%) for revenue, earnings and book value.

The EV/EBITDA is at 9, so the company is not cheap, but its not expensive either. Given the growth, the price seems fair. A risk with this one could be a reduction in the demand for remote technology staffing.

All five of these small companies have different things going for them. Some are very inexpensive, others have good reinvestment or growth opportunities. Because of their size (or lack there of), they all have some inherent risks, but this also gives them a lot of room to run. I plan to create a paper portfolio of these stocks and follow-up at a later date. I included a summary table below and links on more articles for each company throughout the article.

I was a little disappointed to only find 5 companies that I thought had promise out of the 200+. In a future article, I will give it another go with a higher ceiling on market cap (say $2B instead of $300M).

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Note that this article does not provide personal investment advice and I am not a qualified licensed investment advisor. All information found here is for entertainment or educational purposes only and should not be construed as personal investment advice.

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An engineer with a passion for machine learning, the stock market, and python projects.