In my previous article I showed how to compose a small value portfolio by picking the best buys from the ten biggest holdings of each of the funds RZV, IJS, VBR, JKL, EES, IWN and DES. In this article I will discuss a different way to select small-cap value companies: using Yahoo's Stock Screener. With this stock screener I have selected the companies in the table below. The criteria for selection are based on market cap, P/E and Enterprise Value/Revenue. The Enterprise value is the market cap minus short term liquid assets such as cash plus debts.

You might want to reduce the amount of stocks in this list. A smaller list saves you time and transaction costs. There are several ways to pick stocks from this list. First you might want to exclude some of these companies based on for instance ethics (MTEX?) or pollution caused. Then you could select the stocks with lower forward P/E than the current P/E. This means that if the price of the companies shares stays the same the profits will go up. If the earnings indeed increase, that is if the earnings forecast turns into reality, then the price will usually follow. In that case you end up with the stocks SCVL, MTEX, BONT, CHIC, ARII, OXM, SMOD, SPSX, CAS, GPI, JAKK, HMN, DBRN, ALK, KFS, PSS and WCC. You could limit this new list by picking the ten stocks that have the lowest P/E or by picking the ten stocks with the biggest difference between actual P/E and forward P/E.

Another way of limiting the list is just choosing the ten companies with the lowest P/E. These are the tickers BRKS, GVHR, ISH, SAFT, CHIC, CBRL, EMCI, NYM, USU, SFN. Alternatively you could select the ten stocks with the lowest ratio Enterprise Value/Revenue: SMRT, SFN, SCVL, CHRS, YRCW, SPSX, GVHR, GPI, PSS, and SAIA. Or you could also include a dividend criterium in the stock screener. If I demand at least one percent dividend in combination with a lower forward P/E than the current P/E then I get this list: KFS, HMN, GPI, OXM, BONT and MTEX.

As you can see there are many ways in which a small-cap value portfolio can be composed. To be a good investor it is important that you stay consequent. That is once you have choosen your criteria for building your portfolio you stick to them. Do not trade too often, rebalance your portfolio only once or twice a year. Stick to quantitative criteria and do not mix with subjective criteria. Most of these stocks have had some unfortunate events, such as a leaving CEO, lawsuits, earnings warnings, etc. I suspect that these events make that small-cap value stocks are more volatile than the big cap stocks, despite the value in the first category. Obviously there must be some reason why the prices of the small-caps above are discounted. Therefore you should not rely on just one of these stocks, instead buy at least ten. The idea is that in the long run the extra individual volatility pays off and that you beat the main indices.