3 Cheap Small Caps

Despite the lack of value available in today's market relative to this time last year, there are still some intriguing ideas popping up on stock screens. While value comes in various flavors and sizes, one of the best determinants of value centers around the return on capital, or return on equity, generated by the business. If those returns are above the cost of that capital, then the business is creating value. Of course, as an investor, you don't want to pay a premium for that growth. The following list of small cap issues both have high returns on capital and attractive P/E ratios.

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A Shooting Stock
Sturm, Ruger, and Co. (NYSE:RGR) is manufacturer and seller of firearms in the United States. Its products are sold under the Ruger name and have been since 1944. It's a respected name among gun enthusiasts. The shares trade for $15 with a P/E of 9.8. The company has no debt and nearly $60 million in cash, equivalent to $3 a share. In addition, the company sports a 33% return on equity and 10% net profit margins.

And looking at Sturm will lead you to competitor Smith and Wesson (Nasdaq:SWHC) which markets firearms and has been doing so since 1852. Smith and Wesson currently sports a P/E of under seven and a ROE of 36%.

Back to Basics
Lihua International (Nasdaq:LIWA) sells copper and copper products in China. The company generates over $200 million in sales and over $20 million in net profit. The balance sheet has a net cash position, a return on equity of nearly 30% and a forward P/E multiple of four times earnings. Investing in any company in China requires extra due diligence but with valuation multiples this attractive, any company is worth a closer look. (For more, see Investing In China.)

It's very hard to analyze health care stocks with the looming health care bill in 2014. Yet many will agree that the reform in one way or another will increase the number of those insured by private business. And it's doubtful those businesses will take on more people at unprofitable rates. Providence Service Corp (Nasdaq:PRSC) provides government sponsored social services like family counseling, foster care and other specialized health care services. The business trades at under 10 times earnings and generates a nearly 50% return on equity due to a leveraged balance sheet.

Ideas Are Not Always Investments
There are always going to be businesses that will have attractive valuation characteristics in any market environment. The trick is to spend time looking them over to see if any ideas deserve to be made into investments. (For more, see The Successful Investment Journey.)

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