21 genuine value small caps

While these are far from the only measures of value, we have recently tried to bring all these ideas together in a single metric that we somewhat portentously called the "genuine value ratio"(GV). Having previously back-tested the ratio and run a screen using the ratio on the FTSE All-Share constituents (Screening for genuine value, 6 Mar 2013), we're back to search for "genuine value" among small caps and Aim stocks.

Our GV ratio uses quite a lot of fundamental data, and data on small caps can be quite patchy. Indeed, out of the 1,170 Aim and FTSE All-Small stocks we started out with, we were only able to calculate a positive GV ratio for 269 of them. Even using a three-year historic compound EPS growth rate, which we would expect to be easier to come by than broker forecasts, there were a similar amount of useable results. Our screen starts out by looking for the cheapest quarter of stocks based on the ratio, then applies the following tests:

■ One of the great things about small caps is their ability to grow very quickly. But we are wary of excessive growth and have therefore also eliminated companies where earnings are forecast to more than double in either of the years looked at.

■ We also want to see some consistency in earnings growth and have eliminated stocks where the average growth rate is high, but growth is expected to more than halve between the current financial year and the following financial year.

■ A key risk with value stocks is that they are "cheap for a reason". Often share price movements act as a good indicator of sentiment, which can help distinguish a company that is coming out of a trough from a company that is priced to go into one. We don't want to get carried away with momentum with this screen, but we have insisted stocks show stronger three-month momentum than the median average of all 1170 stocks screened (-0.02 per cent).

We highlight the cheapest five stocks based on our GV ratio below and list the other 16 positive results from the screen in the table that follows.

Dart Group

Growth at airline and holiday company Dart Group (DTG) is being driven by the success of its low-cost package holiday business, Jet2. The company recently announced that full-year results would be even better than expected due to falling seasonal losses over the winter period, and Dart should have reached its target of nearly doubling the number of holidays sold during the year. The company has also been raising prices and improving the mix of packages sold, which is benefiting results. Management plans for holiday sales to increase from the target of 400,000 last year to 700,000 this year. The increased number of holidaymakers on Dart's planes is also boosting the efficiency of its airline operations. While the company's yield is not much to speak of, cash generation is strong, although the net cash listed in our table somewhat overstates the case, as at the half-year stage £98m of its cash consisted of advanced payments by passengers.

*Includes advanced payments of £98m by passengers

Source: S&P CapitalIQ

Last IC view: Buy, 111p, 23 Nov 2012

Charlemagne Capital

In the second half of its last financial year, Charlemagne (CCAP) had something of a watershed moment when it began to generate net inflows of money into its funds. The company specialises in emerging market equities and is benefiting from increased appetite for this area. Management has been keeping a tight rein on costs and profits are very sensitive to increases in revenue. The company is currently paying out all its earnings as dividends, which gives rise to broker Singer N+1 forecasting a bumper yield of 8.4 per cent in the current year based on a 1.4¢ (0.92p) payout followed by 2.1¢, or 12.6 per cent, the year after. The forecast PE is modest compared with the mid-teen rating commanded by larger asset managers, but the group's small size does suggest a discount is in order. That said, the current scale of the operation means there is potential for very fast growth, which is what brokers are predicting.

*Includes current investments of $2m

Last IC view: na

Stadium Group

Electronic equipment manufacturer Stadium Group (SDM) has faced tough end markets for some time and things are not expected to change quickly. Growth forecasts for the group are based on self-help measures which are already being put into effect. The company is restructuring its UK operations by closing a facility in Rugby and relocating operations in Hartlepool to Asia in order to reduce costs. At the same time, the company is trying to move out of commoditised products areas into higher-margin business. To this end, the group bought displays business IGT last year and updates so far have suggested trading is good. What's more, following the £3.3m sale of property in Hong Kong last year, the company has net cash and further acquisitions could be on the cards. The company is also imminently losing its chief executive who will be replaced by an internal appointee.

Last IC view: Buy, 65p, 4 Sep 2012

Gable Holdings

Having built up a strong insurance product range in the UK and Ireland, non-life insurance group Gable Holdings (GAH) is now attempting to export the model to Europe using European Union passporting rules. Progress to date has been impressive, with the most recent step forward by the group being the launch of a government contract insurance product in Italy. The company is working with a number of leading industry players and its reputation is growing. What's more, profits are expected to soar as the roll-out continues and the shares are priced at just 4.5 times broker Panmure Gordon's forecast 2014 EPS. The group's size means it is under the radar of many investors at the moment, but if growth continues to come through, that is likely to change. Favourable conditions for insurance rates in the non-life sector should also help.

Last IC view: na

GETECH

Geological resources services company GETECH (GTC) made a particularly strong start to its current financial year. While the pace is expected to slow in the second half, there are still bumper earnings growth expectations for the full year, which builds on a strong three-year record. The company has been particularly successful in selling its Globe product, which helps resources companies assess exploration opportunities. The general nervousness about the prospects of the resources sector is a negative, although trading and recent statements about GETECH's outlook provide little cause for concern. The company's strong share price momentum also suggests the market is sanguine. And, while the dividend is coming from a low base of 1p, broker WH Ireland forecasts decent growth to 1.4p this year, followed by 1.5p in 2014.

Last IC view: na

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