SSR Industrials & Materials Small-Mid Cap Rankings, May 2015

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Graham Copley / Nick Lipinski



May 22nd, 2015

SSR Industrials & Materials Small-Mid Cap Rankings, May 2015

  • We update our small-mid cap rankings – the top 20 names are shown in Exhibit 1 along with the change in positioning from last month.
  • Construction and Transportation related companies dominate the list, highlighted by railcar makers ARII and TRN (and GBX scoring the same 2.75 as the last two names), FSS, OSK, JOY and TTC from the Capital Goods space, and a trio of trucking companies (LSTR, SAIA and SWFT).
  • We parse the universe into small-cap (<$3 billion) and mid-cap ($3-10 billion)the top 10 names in each cohort are shown in Exhibits 2 and 3 on page 2. At the sector level, Exhibit 5 shows the top 3 stocks in each sector for those looking for more sector granularity.
  • In an annual performance back test these screens outperformed their remaining peers by 5.0-7.5%. The results are better with the more focused market cap groups than with the overall group, but the volatility is higher, in part because of the smaller sample size.
  • The small-mid cap analysis contains many of the screens we use in our broader, larger cap coverage modified slightly for the shorter, noisier data sets in the small cap names. These individual metrics are then combined (using weightings derived from detailed correlation analysis with forward performance) to give a weighted score.
  • We provide these lists as possible fertile ground for those seeking ideas in the small-mid cap Industrials & Materials space. We will continue to refresh this analysis monthly and use it as a screening tool to identify specific names for further research.

Source: Capital IQ, SSR Analysis


Our framework assesses sectors and stocks on four major dimensions – valuation, return on capital, capital allocation, and earnings estimates and optimism. We use that framework to identify anomalies which warrant further research that can hopefully lead to investible conclusions. In this report, the monthly update of our original work, that thought process is focused on the small and mid cap area. The universe analyzed encompasses 159 names in the Industrials & Materials sector with market caps below $10 billion (though BLL, CE, and SEE have snuck barely above this mark). We note that not all of these companies have full data sets and have necessarily been excluded from some elements of the analysis – we expect to have closer to the full sample size represented in these tables as we continue to refresh them monthly. The ranking methodology has been backtested for the past three years, with reasonable performance results (see our original small-mid cap report for the full charts).

Below we have the same analysis as shown in Exhibit 1, but restricted to the small (under $3 billion) and mid ($3-10 billion) cap groups.

Strictly Small Caps (market cap under $3 billion)

Source: Capital IQ, SSR Analysis

Mid Cap Group (market cap $3-10 billion)

Source: Capital IQ, SSR Analysis

Notes on Top Ranked Stocks

We noted last month that LSTR’s business model sees the most leverage in a tight capacity environment – the company noted in its quarterly earnings call that conditions had loosened a bit, a comment consistent with the broader slowdown in freight activity year to date (seen more acutely in the rails). For the railcar manufacturers, continuingly weaker than expected rail freight in 2015 was overshadowed during the past month by new regulations on tank cars. GBX and ARII were up 10% on the news. Fellow railcar maker TRN has also trended higher off its lows since the regulation announcement, but the federal investigation into its highway guardrails is a key source of uncertainty in the name. CCK continued to perform well over the past month but remains in the back end of the top 20 names on our screen. Among the new entrants to the top 20 is Neenah Paper (NP), which appears to have a focus on the less commoditized segments of
the paper market
. The stock’s TSR and optimism ranks are impressive for an industry that is historically volatile with a low degree of forward visibility.

Sector Analysis

Exhibit 4 shows the composition of the universe of 159 small-mid cap stocks and Exhibit 5 lists the top three ranking names in each sector, based on the overall analysis in Exhibit 1. The overall composition is not dissimilar to our overall Industrials & Materials universe.

Exhibit 4

Source: Capital IQ, SSR Analysis

Exhibit 5

Source: Capital IQ, SSR Analysis


Below we show a graphical representation of our analytical framework. The components are interconnected and include:

  • Valuation
    • The valuation work for our full universe of stocks is heavily based on a company’s long term return on capital. For these small cap names we often have insufficient data histories to utilize our ROC based models, so we here look at EV/EBITDA (forward) and Price/Book.
  • Return on Capital
    • We still consider return on capital but the data set is pulled from Capital IQ on a quarterly basis as opposed to the monthly, model generated, figures that we typically use. Please refer to our piece from January which reviews our methodology and models in greater detail.
  • Optimism & Earnings Revisions
    • We have done extensive work on corporate optimism, finding that companies with management teams that are consistently over-optimistic about their prospects underperform considerably and erode returns on capital in the long term – see our recent piece on the topic.
  • Capital Allocation
    • For the small cap companies here we look at two trailing metrics, 3 year average TSR and dividend yield. We assign a negative weight to the dividend yield, which has a negative correlation with forward performance for this group.

Weighted Score by Company (ranked best to worst):

©2015, SSR LLC, 1055 Washington Blvd, Stamford, CT 06901. All rights reserved. The information contained in this report has been obtained from sources believed to be reliable, and its accuracy and completeness is not guaranteed. No representation or warranty, express or implied, is made as to the fairness, accuracy, completeness or correctness of the information and opinions contained herein.  The views and other information provided are subject to change without notice.  This report is issued without regard to the specific investment objectives, financial situation or particular needs of any specific recipient and is not construed as a solicitation or an offer to buy or sell any securities or related financial instruments. Past performance is not necessarily a guide to future results.

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