For the same reason we didn't want to over-react to a couple of recent selloffs, we don't want to over-react to today's strength either. The market is still in limbo. And, while it is on hold in terms of a trend, we can take the time to do the kind of bigger-picture research that will give us a serious edge... particularly within the small cap realm.  And what's today's topic? Earnings trends, not just at the small cap level, but broken out into individual sectors.  Call it 'overkill' or 'over the top' if you like - I plead guilty as charged. On the other hand, paying attention to fine details can make you a fortune in the market, as you see things that may have been obscured if you weren't specifically looking for them. On that note, I've got some eye-openers for you today.  After that, we'll look at some of the recent comments from our community contributors. On the table this week are Scientific Games (SGMS), Cereplast (CERP), and Famous Dave's of America (DAVE) just to name a few.    Not All Sectors, Small Caps Are Built the Same I'm not even going to get into the argument of whether the recent dip was rational or not. I don't think it was, given the trailing and projected earnings progress we've seen from Corporate America despite the economic headwind. But, that's a discussion we've already had, and it's a debate nobody will win until the future becomes the present.  Rather, I'd like to get back in the small cap saddle again and start dissecting the market's diminutive names in our search for hidden values. There are several ways to step towards the end goal; today's will focus on sector valuations, specifically at the small cap level.  Yes, I know slicing out just the small caps and then further slicing them out by sector makes me a data junkie, or a nerd, or both. That's fine. Just know that paying attention to details like this - the ones that others ignore - is one of those investing edges that can mean the difference between good and great.  No fanfare needed - the nearby chart tells the tale.  While the trailing and forecasted P/E measures may seem on the high side, bear in mind this is a snapshot of only the small caps in the sector groups. You're going to have to pay something of a premium for the growth opportunities they offer that their large cap counterparts can't offer.  Plus, small caps are more likely to post losses than their large cap counterparts, which can really sap the aggregate 'E' and inflate the P/E figure. That doesn't mean all the small caps in the sector are overpriced.  By that token, you should also know that current and future average P/E ratios for these small cap sectors are still actually below their historic norms.  So what? At the very least these numbers can serve as a benchmark, with which you can make valuation comparisons. Frankly though, I see this simple research as a stepping stone for something a little more straight-forward.... a search for an undervalued sector (or overvalued ones).  Take small cap basic materials stocks for instance. With a trailing (through Q2-2010) P/E of 15.5, they are the second-cheapest group on the board.... a fact obscured by a lot of noise from the large brethren in the sector. And, given the earnings growth trend, I have little doubt that the 2011 P/E is within reach; these companies should be able to easily reach their estimates.  In the same vein, small cap health care stocks seem to be on the verge of 'well worth it'. The trailing P/E of 18.2 is respectable, and the 2011 forecast of 15.0 is outright buyable.  But what makes me so sure healthcare is on pace to reach those relatively lofty earnings estimates? Here's where paying attention to details (and having access to too much information) pays off.  Check out the nearby chart of the S&P 600 Healthcare Index. See anything curious? Earnings barely flinched during the recession. In fact, the group earned more in 2008 than it did in 2007, and earned more in 2009 than it did in 2008. Yet, these stocks were hammered just like the rest of the market.  Yes, they (the stocks) did eventually recover on an absolute basis, but by the time the index was revisiting 2007's peak levels, earnings were well beyond 2007's earnings levels.  In simplest terms, take the hint - this group is indeed recession proof... information that could prove valuable if we slip into recession again. As more and more investors figure out what I just showed you in pictures, these healthcare names should actually thrive in a recessionary environment, for the right reasons.  You can use the premise to spot problem areas as well. Take the small cap financial stocks as an example. Nobody would argue that the trailing P/E of 78.5 is a miserable number. Some would argue, however, that the group is coming out of a recession and will look expensive while they do; the number to focus on is the projected (2011) P/E of 17.6.  The thought process is logical, but there are two missing details...earnings growth is already slowing down, and the group will literally have to double Q2's earnings in Q4 in order to reach 2010's forecast. Worse, the group will have to double 2010's total earnings in 2011 to reach next year's targets. Sorry, but there's no economic condition we could possibly enter that would allow small cap financial stocks to do that. (And even of they do perform that miracle, those income levels are still lass than half of 2007's peak income.)  A couple of more quick highlights....  I know on the surface that the consumer discretionary sector looks overvalued now, making the projected P/E of 12.4 a little tough to swallow. I wouldn't doubt the outlook though, based on the earnings trend for the group. These companies made more money in Q2 of 2010 - supposedly still in the midst of a recession - than they did in Q3 of 2007... the peak of excess consumption. And as the chart shows, the earnings growth trend has been a smooth and reliable one since the bottom.  Small cap energy stocks, on the other hand, continue to face surprising challenges.  Believe it or not, this group is actually more expensive now than in was in mid-2007. Of course, diminished earnings (a lower 'E') is more the cause of the higher P/E ratio than a bigger 'P', but still....  Regardless, earnings are leveling off here - and they're doing so well shy of 2007's average; earnings growth is expected to be anemic going forward too. That reality is obscured by the raw numbers alone, as a very nasty Q4 of 2009 is inflating the trailing P/E ratio, making it look like there's a lot of progress here. There's not, as the chart shows.  You get the idea - some of the forecasts are legitimate, and some aren't. Before jumping to conclusions though, it helps to 'see' an updated earnings trend; not all is as it seems on the surface. I'll be working through more of the small cap-specific sector earnings charts in the near future.  Helping you get more out of the market, James Brumley Editor - Small Cap Network      From The Community  - Latest Commentary - Are You In on These Earnings and Deals? EXTR, WTSLA, SGMS The stock's already oversold anyway, so when you factor in the massive contract Scientific Games Corp. (NASDAQ:SGMS) was just award by the state of Illinois, it's no wonder Dennis Askew recommended buying it on the dips (which is just did). Here's the whole scoop.  Are They Really Headed Up? GTLS, PLX, SVM Is silver the new gold? Considering gold is over-speculated now (and has little actual utility), versus silver, which trades more on fundamentals and has a few more practical applications, Silvercorp Metals Inc. (USA) (NYSE:SVM) may well be..... worth it's weight in gold. (Sorry, couldn't resist.) This miner is not only enjoying higher silver spot prices, but is also producing more of it. No wonder the chart's starting to heat up again.  Green Lights - GXP, CYBI, and DAVE Finding Their Groove There's no gray area here - Famous Dave's of America, Inc. (NASDAQ:DAVE) is an outright 'buy', technically, and fundamentally. The stock is one of the few in restaurant group to make persistent progress over the last 15 months, and one of the few to generate equally-consistent income. With a P/E in the 10/11 range, this one's just an all-around solid long-term pick. Don't Overthink It - Looks at HSIC, URRE, and DRL At the time James Brumley mentioned yesterday that Uranium Resources, Inc. (NASDAQ:URRE) was itching for a breakout, it was only a strong possibility. As of today, the last hurdle he pointed out then has been cleared.... though it's still a tentative move. If you want to know how to play it next, here's the answer.  Are These Stocks Too Good to be True? CERP, AXU, ARQL What's a plastic bag worth? A lot, of you're a Cereplast, Inc. (NASDAQ:CERP). The company has found a way to use resins for a great deal of the petroleum-based components of plastic bags, and manufacturers are starting to take notice. More importantly, they're starting to put money on table. Best of all, it's green-friendly.    We Value Your Feedback Got comments, questions or suggestions? Send 'em on over: Email the Editor If you wish to send a written request or inquiry, please send it to our physical address: TGR Group, LLC  4653 Carmel Mtn Rd  Suite 308 #402  San Diego, CA 92130   Share the SCN Newsletter If you find the Small Cap Network Newsletter informative and profitable, please forward our newsletter alert service to like-minded friends and associates who share similar market interests.   Ensure Newsletter Delivery To ensure newsletter delivery, you can add any additional email addresses you may have to the Small Cap Network Member List. Receiving the Small Cap Network Newsletter in multiple locations is the best way of making sure you don't miss the next investing or trading opportunity! For web based email addresses, the Small Cap Network recommends @yahoo.com or @aol.com for timely and reliable email newsletter delivery.   Change Your Subscription Settings