These 5 Stocks With High ROE & Profit Margin Can Emerge as Wealth Creators in Smallcap Space
As Q3 earning season makes NIFTY volatile, the fear that small caps may come under sharp pressure is back on the street. The market is still not over the impact of corrections which small cap stocks, witnessed since November 2021. However, small cap companies which operate in niche products and services or have brands with strong market share tend to get the attention of the market even when overall small cap is under pressure.
In order to look for such companies, different combinations of financial ratios were used with high return on equity being one of the main filters. Along with it high net profit margins (NPM) was used to find companies where analysts rating was either a “strong buy” or “buy”. Also a company should have an institutional shareholder holding a minimum 5 percent. The institutional shareholders stake is a sign that a certain level of due diligence would have taken place.
The selected small caps list is also based upon some of the most relevant, time tested & useful fundamental ratios which are so crucial & central in gauging the performance of a company. So, a minimum return on equity of 20% is taken into consideration while computing this list. In addition to that, a net profit margin of at least 10% is also applied to filter down the list further. Net profit margin measures the ability of a company to generate profits from its sales and check if its operating & overhead costs are under control or not.
The curated list applies different algorithms for all BSE and NSE stocks. For this article, we have taken only small cap stocks from the list of NSE stocks into consideration. The data used in screening down these small cap stocks has been gathered from Refinitiv’s Stock Report Plus. Also, only those small caps are selected in the list which have shown positive returns of more than 15% in the last 1 year.
Further, we have checked whether this curated list of small cap stocks possess a high growth potential over the next 12 months and if these enjoy confidence from the analyst community. For this, we have narrowed down the list by selecting only those small cap stocks with an average recommendation rating of “Strong Buy”. These stocks show an upside potential in the range of 16% to 56%. Also, we have selected stocks where the average stock report plus score is a minimum of 7.
The average score is based upon the five key pillars i.e. earnings, fundamentals, relative valuation, risk and price momentum. However, for smallcaps being a proponent of high risk & high reward ratio; due diligence must be followed for filtering out & choosing the right set of these stocks. For this reason, we have filtered out those small cap stocks which have the institutional ownership of less than 5%.
The data used in screening the following 5 small cap stocks has been gathered from the latest Refinitiv’s Stock Reports Plus report dated Jan 19, 2023.
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