Newsletter Watch: Favorite growth and value small caps

Richard Moroney, editor of Upside Stocks, applies quantitative analysis to the search for growth and value-oriented small-cap stocks, most recently choosing small caps EZCORP, Inc. (Nasdaq:EZPW) and Natural Gas Services Group, Inc. (AMEX:NGS) as “buys” through his proprietary Quadrix system.

According to the advisor, who is also well-known for the blue chip, large-cap-oriented Dow Theory Forecasts, now might be a particularly good time for investors to consider small-cap stocks. After completing a rigorous analysis of stock performance and valuations, he says, "As the price/earnings ratios of small stocks have contracted, those of the fastest growers have contracted the most."

He says that since last Sept. 30 (when the S&P SmallCap 600 was within 5% of its all-time high), the median P/E ratio for all stocks in the index has dropped to 16.8 from 19.4, a 13% decline.

"Among the one-fifth of S&P 600 stocks with the highest expected five-year profit growth, the median P/E has dropped to 22.7 from 29.9 — a 24% decline." His conclusion? "Investors' reluctance to pay up for growth stocks represents an opportunity, provided you're selective."

It is this "selectivity" that is the key to success, according to Moroney. "You should not limit your search to companies with just the very best expected growth rates, partly because such consensus forecasts are not very accurate."

Rather, the advisor says the current environment argues in favor of a focus on both growth and value. "With the overall outlook for corporate prospects deteriorating, you should consider redoubling your search for attractively valued growers," . . .

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