Finding the Best Small-Caps to Buy in Q1

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In case you missed it, my good friend and TradeSmith Daily contributing editor Lucas Downey recently published an incredible three-part study all about investing in election years.

He pored through the proverbial history books, looking for evidence of what size stocks do best in election years… which sectors do best… and when we should expect the biggest gains. (Use those links to catch up on the study if you haven’t been following along.)

Here’s what Lucas found…

In election years, we should be hyper-focused on small-cap stocks in the Financials and Health Care sector, with the first quarter being the best time to buy them ahead of a huge surge in the second half of the year.

This presents a fascinating, immediately actionable setup. One we can research with ease using TradeSmith’s toolkit.

So today, I want to show you how you can find stocks just like these, using TradeSmith’s best-in-industry tools.

I’ll even share the names of two small-cap stocks that are well worth putting on your watchlist this quarter.

A Must-Have Tool: The TradeSmith Screener

Like all of the amazing tools that make up TradeSmith, the Screener tool is accessible through our all-in-one analysis platform, TradeSmith Finance.

Subscribers of Trade360 (including our Platinum members) get access to the Screener tool, which lets you narrow the entire universe of stocks that we track precisely the ones you’re looking for.

You can also access it by selecting the Invest menu at the top of TradeSmith Finance, and then the Screener tab beneath. Afterward, select “Create new screener” to design and save a screener you can access later.

So, we’re looking for high-quality, small-cap Financial and Health Care stocks. For that, we’ll need a few key filters.

The Manage Filters screen, which you can access when creating a new screener, lets you select from dozens of distinct metrics. For this search, though, we’ll keep it simple.

We’ll consider the Health Status to determine the stock’s quality, the Sectors filter to narrow down to our chosen sectors, the Asset Type filter to remove anything that’s not a stock (like warrants or ETFs), and the Market Capitalization to search for only small-cap stocks. And finally, I’ll add the Price-to-Earnings Ratio to get a good read on value. With our filters selected, now we can apply the details and run the Screener. Here’s how I set it up: This screen will return all the small-cap Financials and Health Care stocks in the Green Zone — a measure of positive momentum. I’ve also adjusted the P/E ratio range to ensure we get stocks that are profitable (above 0) and cheaper than the broad market (below 22, a round-up of the S&P 500’s current trailing-12-months P/E ratio). You can display the results based on any of the factors shown; I’ve selected Health, with those in the Green Zone the longest appearing at the top.

And here are my top 10 results: These are the top 10 results based on TradeSmith Health Indicator. The top entries have been in the Green Zone for at least one year, a strong sign of underlying quality and momentum.

But that’s just the beginning of what you can do with the results…

If you’re volatility averse, you can sort by the Volatility Quotient (VQ%) — our proprietary measure of underlying volatility — and look at those stocks with lower volatility. If you want to know which stocks appear as recommendations in any of the newsletters you follow (TradeSmith or otherwise), or are part of other TradeSmith Ideas Lab strategies, you can sort for those. And if you’re looking for stocks with the lowest P/E ratios, you can do that too.

Before we wrap up today, I’ll single out two names that catch my eye.

One of them is WisdomTree (WT), a sponsor of exchange-traded funds and other similar investment products. We’ve actually discussed WisdomTree recently; it’s one of the firms that has successfully listed a new bitcoin ETF.

WT has all the markings of a quality small-cap financial stock. It’s been in the Green Zone for more than a year. Its price is at a slight discount to the broad market. It issues a 1.72% dividend yield at writing. And while it may have somewhat high volatility at about 25%, this is par for the course in the small-cap space.

On the medical side, Disc Medicine (IRON) also stands out. At a $1.5 billion market cap, this biotech company has been in the Green Zone for nearly a year and is priced at just 12x earnings — unique for a biotech stock. It has a markedly higher VQ, which is noteworthy, but again, not uncommon for small-cap (or biotech) names.

I wanted to do this today to demonstrate how easy TradeSmith makes it to research any investment idea you come across.

Just scroll on up and look at the filters screenshot again… It really showcases how many methods there are for slicing and dicing the market to find the best opportunities, and how simple that is to do with the right tools.

As a TradeSmith Platinum subscriber, you already have complete access to everything offered in the Screener and everything else that we continually add to the TradeSmith Finance platform. Go right here to log in to TradeSmith Finance and start using TradeSmith to its full potential.

To your health and wealth,

Michael Salvatore
Editor, TradeSmith Daily