Color to the Numbers: Top Small-Cap Value Stocks

Thanks to Internet sites such as Yahoo! Finance and MSN Money, investors have more tools than ever to search for stock ideas by running screens. But screens often return numerous stocks that need to be weeded out, because the numbers don't tell the whole story. For instance, maybe a company's massive growth was a result of one-time tax adjustments, rather than core operations.

Just like the color-by-numbers books that kids doodle on, the picture for stocks pulled from any screen isn't clear until we add the appropriate hues. In this edition of "Color to the Numbers," we'll enlist Motley Fool CAPS for a Foolish look at a screen for small-cap value stocks, and we'll use it to examine which stocks merit further investigation and which should be cast aside.

Better a screen than a window
The community of knowledgeable investors who rate stocks in CAPS will help us in our search. In CAPS, investors can see how the collective community rates a company and can compare that rating with the opinions of the very best All-Star stock pickers -- CAPS players with a ranking greater than 80. There are even pitch commentaries and blogs to lend detail to the bull and bear opinions. In all, CAPS gives investors qualitative resources far beyond mere numbers and tables.

Here are the criteria for our value screen today:

• Market cap between $100 million and $1 billion.
• A debt-to-equity ratio of less than 0.5.
• Free cash flow of at least $5 million.
• A projected five-year earnings growth rate of at least 15%.
• A forward price-to-earnings ratio of less than 15.

This should give us the cream of the crop in terms of small companies on a solid foundation with decent expectations for earnings growth. But numbers alone don't make a company a good investment. (Hint: This is where CAPS can really help.)

Opinions with the numbers
Here's a sampling from the list of stocks our screen pulled up today.

Here's a little of the color CAPS has to offer on a few of these companies:

Little pharma
Life for pharmaceutical companies can be a neverending series of hills and valleys -- either the company is flying on the success of a new drug, or its failure drags shares into the abyss. Aspreva is no different; the small-cap pharmaceutical doubled in size in 2006, only to retrace most of the rise as royalty revenue from its autoimmune drug CellCept fell short of expectations. The company recently delivered more bad news, announcing that the drug had proven ineffective as an induction therapy for lupus.

But while the company faces the threat of generic drugs a few years out (when patents expire on CellCept), some investors see the company as fundamentally strong enough to weather future storms. Aspreva's $324 million in cash and short-term investments, low forward P/E of 4.2, and beaten-down shares combine to make it an attractive turnaround play in many CAPS investors' minds. More than 98% of CAPS players ranking the company are confident that it will beat the S&P going forward.

Getting wired
One of the great advantages of CAPS is getting the skinny on companies that are largely overlooked on Wall Street. Houston Wire and Cable is a great example of a boring company that doesn't generate the same enthusiasm as an Apple or Google, but still shows some impressive numbers. The distributor of specialty wire and cabling has grown revenue at nearly a 30% clip the past three calendar years and analysts anticipate 17% growth in earnings in the future. The company also recently increased its share buyback allocation to $50 million, as shares have lagged following disappointing second-quarter earnings. A majority of CAPS investors, including 86 out of 87 All-Stars, have cast a bullish tone for the company's future.

Let 65,000 investors be the judge
The collective wisdom of a huge pool of investors can quickly add color to a whitewashed page of numbers. But even with an entire community of qualified opinions acting as the judge, individual investors are still the jury and should perform their own research.

Want to see your favorite screen results run through the wringer in the CAPS community? It's free to tap the knowledge base -- and even give your own opinion -- in Motley Fool CAPS.