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 Stocks For a Trade War

The looming trade wars could spell trouble for stocks of companies doing business overseas. What should investors do? One solution would be to stick with smaller U.S.-based companies that don’t do significant business overseas.

These are called “small-caps,” where “cap” refers to market-capitalization, which is how most investors measure company size.

Here’s a stock screen for finding small-cap candidates using a momentum strategy, which involves focusing on stocks with already strong price charts and issued by firms with rapidly growing sales and earnings.

You can run it using finviz.com’s free screener. Get there by selecting Screener from the FINVIZ.com homepage (finviz.com). Start by selecting “All” on the Filters bar to see the entire list of available filters (screening choices). Then, use each filter’s dropdown menu to pick a value.

Define Small-Cap Universe

Use the “Country filter” and specify “USA,” then use the “market-cap” filter to specify “Small.”

Some small-caps are lightly traded, making them difficult to trade. Use the “Average Volume” filter to specify “Over 50k,” which requires passing stocks to trade at least 50,000 shares daily, on average.

Next, use the “Price” filter and specify “Over $15.” Momentum trading strategies require positive market sentiment, and given the current hot market, stocks trading under $15 would be considered “out of favor.”

Earnings Momentum

Next, we’ll isolate stocks with earnings momentum, meaning that stock analysts are forecasting strong future earnings growth. 

Require “Over 15%” for forecasted “EPS Growth this year,” “Over 30%” for expected “EPS Growth next year,” and “Over 10%” for average annual “EPS Growth next 5 years.”

As a check to assure that the firm is actually growing in terms of revenues. Use the “Sales Growth Quarter over Quarter” filter and specify “Over 15%,”

Finally, in terms of EPS momentum, require that the firm is currently profitable by specifying “Positive” for “Return on Equity,” which limits your list to companies that have been profitable over the past 12-months.

Price Chart Momentum

Use the “Performance” filter to specify “Year-Up” and the “Performance 2” filter to specify “Quarter Up” to confine your list to stocks that have moved up in price over the past year, and that strong performance has continued over the last three months (quarter).

Finally, to rule out formerly strong stocks that have recently faltered, specify “Price above SMA” using the “50-Day Simple Moving Average” filter. Stocks meeting this condition are probably still uptrending.

Valuation Check

The downside of momentum strategies is that the stocks you find are often grossly overvalued. Use the price to sales (P/S) valuation ratio to rule out such stocks. P/S compares the current share price to the last 12-months per-share sales. P/S ratios below four identify reasonably-priced growth stocks. Specify “Under four” using the “P/S” filter to rule out overpriced stocks.

Screen Results

My screen turned up four small-cap momentum candidates. Click here to see which stocks the screen is turning up today.

Industrial products distributor DXP Enterprises (DXPE)

• Energy industry products distributor MRC Global (MRC)

• Professional engineering consultant NV5 Global (NVEE)

• Wind blade maker TPI Composites (TPIC).

As always, consider the stocks turned up by this screen to be research candidates, not a buy list. The more you know about your stocks, the better your results.

published 6/14/18

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