Hunting for small cap shares with an attractive blend of low valuations and strong share price momentum has been tough work in 2013. Several months of rising prices have drained the pool of potential bargains and recent market declines have left investors nervous about where stocks will go next. In the six weeks since the Europe Edition of Stockopedia was launched, markets across the Continent have suffered the same fate. But while it’s early to be drawing concrete conclusions about the types of investment strategies that might be working in Europe right now, there are some interesting patterns emerging. Among them is the surging recent performance of a micro-cap value and momentum model devised by US fund manager, James O’Shaughnessy.
In the UK, O’Shaughnessy’s Tiny Titans screen has delivered some impressive market-beating results recently. After spending much of the past year generally moving in line with the FTSE, the screen took off in early April and hasn’t looked back since, producing a three month return of 8.0% against -1.7% for the market. The model focuses on small-cap stocks (maximum £150 million market cap) with low valuation ratios (price-to-sales ratios below 1x) and then sorts them for those with the highest share price strength relative to the FTSE over one year.
O’Shaughnessy insisted that while small cap stocks can be more volatile, the advantage of buying under-researched and lesser understood companies is that they can experience very sharp price gains. So far this year he has been proved right, with the UK version of this value and momentum formula producing a return of 22.5%, driven by the likes of Helphire (LON:HHR) , Thorntons (LON:THT) and Terrace Hill (LON:THG) . In fact, the screen has proved to be remarkably stable despite the volatile conditions.
Hunting for European Small-Caps
Meanwhile, the European version of Tiny Titans is also making its presence felt, with a one month return of 6.2%, outperforming the recently declining FTSE Eurofirst 300 index by 11.3%. One of the surprising patterns in the current holdings is the preponderance of Greek quoted companies, which could have investors reaching for a stiff drink.
The Athens Stock Exchange has lost around 60% of its value over the past four years…
