Searching for Value in the Small-Stock Sell-Off

Time to think small.

The S&P Smallcap 600 Index includes stocks with market capitalizations of less than $2 billion, and this year it is significantly underperforming its large-cap cousin, the S&P 500 Index.

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The de-coupling evident in our first chart creates a compelling opportunity, according to technical strategist Chris Verrone of Strategas Research Partners. He notes there have been just two other occasions since 2009 when small caps lagged large caps to such an extent. In each case, value buyers stepped in, narrowing the gap and and ultimately causing small caps to significantly outperform.

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The "action" is obvious: Buy the exchange-traded fund for the iShares Russell 2000 index (IWM) of small cap stocks. Taking the concept one step further, we can target those small-cap companies whose stocks have fallen the most, and yet whose earnings are forecast to rise the most. We set thresholds of -20 percent and +20 percent.

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Additionally, we considered only those companies generating earnings, rather than losses. Just nine companies made the list, and we shared them on-air: Aceto Corporation (ACET); American Woodmark Corporation (AMWD); Christopher & Banks Corporation (CBK); DTS, Inc. (DTSI); FARO Technologies, Inc. (FARO); Haemonetics Corporation (HAE); Rudolph Technologies, Inc. (RTEC); Tangoe, Inc. (TNGO); Tyler Technologies, Inc. (TYL).

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As an additional benefit to blog readers, we have included several additional consumer stocks. They have not sold off quite as hard as the nine mentioned on air, yet still offer good value based on strong earnings growth: E.W. Scripps Company (SSP); La-Z-Boy Incorporated (LZB); Movado Group, Inc. (MOV); and Winnebago Industries (WGO).

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