Stocks we wished had made it to our Top Ideas

As written in our previous blog post (See: Small cap value outperforms in 2012), last year we had very good results for Investorfile's small cap value stock picks. Our Top Ideas posted a combined average total return of over 25% in 2012 and, if we include the first few weeks of 2013, the gain is much higher.

Despite our success, we are humbled by a few notable misses. While none of our Top Ideas to date have bombed -- quite the contrary — we did have two small cap stocks that we researched and, in hindsight, should have included in our Top Ideas list in 2012.

Our first miss was Petrowest Corporation (TSX: PRW - $0.80), a diversified energy industry service provider supplying exploration and drilling activities in Western Canada. Petrowest was a turnaround story, trading for $0.30 when we first considered this Company in the beginning of 2012 as a candidate for one of our Top Ideas stock picks. We let pass an investment in Petrowest and the stock price is up 167% since. Too bad!

Next was Rifco Inc. (TSXV: RFC - $3.66). Rifco is national auto finance company that provides automobile loans through its dealer network across Canada. It offers consumers financing options for the purchase of new and used vehicles. We followed Rifco last summer; the shares were trading $1.35 and we even wrote a blog post on the Company's investor relations program. (See: A simple small cap investor relations strategy that works). Unfortunately this stock, which was on our short list, never made it to our Top Ideas list. A 171% return passed up!

So why did we fail to recognize these small cap stocks as good value investment opportunities?

We evaluate our small cap value stock candidates on three main criteria: management credibility, balance sheet strength and growth outlook with a basis for value. What is most subjective in our analysis is the weighting we attach to each criterion. This can be heavily influenced by factors that could be company, industry or economy-related at any one time. Therefore our research methods are not an exact science and stocks like Petrowest and Rifco are the proof of that.

Do we feel we need to change our approach?

The answer lies with the other side to our story, the dozen or so small cap stocks last year on our short list which did not make the final grade for our Top Ideas. In hindsight, they were all the right decisions to exclude.

We may have missed on a few big stock wins, but we avoided many more mistakes. More importantly to date, our Top Ideas have still been very rewarding for small cap value investors.

Author's Ownership Disclosure: TSX: PRW – None, TSXV: RFC - None