MARKET COMMENT
How To Pick Small-Cap Winners

By Maynard Paton (TMFMayn)
August 11, 2004

Want to know how to pick small-cap winners?

Look for companies that exhibit a low price to earnings (P/E) ratio, a decent dividend yield, little or no debt and the prospect of significant profit increases to help prompt a favourable re-rating.

Or subscribe to the Motley Fool's Value Investor newsletter, which finds them for you.

This Fool article from a year ago proves the value process. At the time, the following three small-caps matched up to the aforementioned measures.

Here's how the shares have performed since:

(*Effective price based on terms of recommended bid made in October 2003)

Average gain? A mega 49%. The FTSE All-Share in the past twelve months has improved just 7% with dividends reinvested.

Access Plus, a junk mail printer, was bought by TripleArc (LSE: TPA) last October. Shareholders were offered 150p per share in cash plus 3.516 shares in the predator. A month before the offer was made, Access had presented an upbeat set of first-half figures. Debt was reduced to almost zero and new contract wins were said to ensure further growth.

Construction services firm Tolent (LSE: TLT) produced the largest gain, with February's full-year results bang in line with the earlier expectations. Yesterday's interim numbers showed further progress; earnings surged 52% while the dividend was lifted 44%. A large cash balance was also revealed. Brokers will be busy revising this year's forecasts upwards, but at present the P/E is 6.8 and the yield 4.7% on a trailing twelve-month basis. Read more on Tolent.

Churchill China (LSE: CHH) has been the relative disappointment of the three, providing a gain of just 26%. However, it has not failed to deliver on the accounting side, with annual results in March meeting City forecasts spot on. The ceramics company continues to recover from its late 1990s problems, with analysts expecting profits to jump 32% in 2004. At the moment, the forward P/E is 8.4 and a 5.4% prospective yield is on the table. In addition, Churchill carries net cash while net tangible assets amounted to 248p per share at the last count, giving a price to book of 0.82. Read more on Churchill China.

Maynard writes every month for the Motley Fool's Value Investor newsletter. He usually tips a small-cap share based on the criteria outlined above and selected Churchill China for the February edition at 210p. To enjoy a FREE 30-day newsletter trial, click here.