In this article, we discuss 10 small-cap stocks to buy during recessions.
The Russell 2000 Index is widely recognized as the benchmark index of the stock market when it comes to measuring the performance of small-cap firms. The index, comprising the smallest 2,000 stocks in the Russell 3000 Index, is down over 21% year-to-date as of May 25. Generally, a year-to-date fall of more than 20% in any index indicates that the stocks are in the bear market. Compared to the YTD losses of the S&P 500 and the NASDAQ Composite, the performance of the Russell 2000 has been consistent with the macroeconomic situation.
Small-cap firms are considered more exposed to economic growth and slowdowns than large-cap companies. However, in a recent report, investment advisory Bank of America highlighted that the 28% fall from peak prices in November for the Russell 2000, compared to the 17% fall in the S&P 500 over the period, indicated that investors had already priced in recession fears into small-cap firms, thus leaving large-cap companies more vulnerable to future losses should recession fears in the market increase further.
Large firms like Morgan Stanley (NYSE:MS), Intel Corporation (NASDAQ:INTC), and U.S. Bancorp (NYSE:USB) are all facing recession fears as inflation increases and the Fed raises rates to tame soaring prices, inadvertently slowing down economic growth. According to Bank of America equity strategist Jill Carey Hall, historical moves suggest greater downside risk potential from current levels for large rather than small firms. On average, small-cap stocks have declined by 36% during a recession. With a 28% decline, investors have already priced in 80% of the recession risk. This leaves the sector with plenty of room to climb back up more quickly than large-cap firms as the economy recovers.
Our Methodology
These stocks were picked using market capitalizations. Companies that have a market capitalization of around $300 million to $2 billion were preferred for the list. Firms that provide reliable dividend payments or are well-positioned to increase their earnings in light of rising inflation and interest rates were selected. The business fundamentals and analyst ratings of each company are also discussed to provide some additional context.
Hedge fund sentiment was included as a classifier as well. Data from around 900 elite hedge funds tracked by Insider Monkey in the first quarter of 2022 was used to identify the number of hedge funds that hold stakes in each company.
Source:unsplash
Small-Cap Stocks to Buy During Recessions
10. Delek Logistics Partners, LP (NYSE:DKL)
Number of Hedge Fund Holders: 1
Market Cap as of May 25: $2.5 billion
Delek Logistics Partners, LP (NYSE:DKL) is an oil and gas storage and transportation firm. The company posted earnings for the first quarter of 2022 on May 3, reporting earnings per share of $0.91, beating market expectations by $0.02. The revenue over the period was $206 million, up more than 35% compared to the revenue over the same period last year and beating market expectations by over $32 million. In the first three months of 2022, the distributable cash flow was $51.7 million, compared to $52.5 million in the first quarter 2021.
Delek Logistics Partners, LP (NYSE:DKL) has a solid track record in the dividend space. It has paid a growing dividend to shareholders consistently for the past 10 years. On April 25, the firm declared a quarterly dividend of $0.98 per share, an increase of 0.5% from the previous dividend of $0.97 per share. The forward yield was 7.34%.
At the end of the first quarter of 2022, 1 hedge fund in the database of Insider Monkey held stakes worth $401,000 in Delek Logistics Partners, LP (NYSE:DKL), compared to 2 in the previous quarter worth $1.8 million.
Among the hedge funds being tracked by Insider Monkey, Chicago-based investment firm Citadel Investment Group is a leading shareholder in Delek Logistics Partners, LP (NYSE:DKL), with 50,800 shares worth more than $2.2 million.
Just like Morgan Stanley (NYSE:MS), Intel Corporation (NASDAQ:INTC), and U.S. Bancorp (NYSE:USB), Delek Logistics Partners, LP (NYSE:DKL) is one of the stocks that smart investors have on their radar amid recession fears.
9. Gevo, Inc. (NASDAQ:GEVO)
Number of Hedge Fund Holders: 7
Market Cap as of May 25: $758 million
Gevo, Inc. (NASDAQ:GEVO) operates as a renewable fuel company. The firm aims to commercialize gasoline, jet fuel, and diesel fuel to achieve zero carbon emissions through renewable alternatives. It also plans to reduce greenhouse gas emissions with sustainable alternatives. The firm is based in Colorado and was founded in 2005. It employs around 100 people.
In early February, Citi analyst Prashant Rao initiated coverage of Gevo, Inc. (NASDAQ:GEVO) stock with a Buy rating and a price target of $5, noting that the firm was on track to “hitting a potential inflection point in its cash flow profile” in the coming months.
At the end of the first quarter of 2022, 7 hedge funds in the database of Insider Monkey held stakes worth $9 million in Gevo, Inc. (NASDAQ:GEVO), the same as in the previous quarter worth $10 million.
Among the hedge funds being tracked by Insider Monkey, Atlanta-based investment firm Masters Capital Management is a leading shareholder in Gevo, Inc. (NASDAQ:GEVO), with 1 million shares worth more than $4.6 million.
8. Midland States Bancorp, Inc. (NASDAQ:MSBI)
Number of Hedge Fund Holders: 10
Market Cap as of May 25: $567 million
Midland States Bancorp, Inc. (NASDAQ:MSBI) operates as a financial holding firm. It operates 52 full-service banking offices. These offices offer various deposit services, including checking, savings, money market, and sweep accounts, as well as certificates of deposits. The firm also offers other services like financial and estate planning, trustee and custodial services, investment management, tax and insurance planning, business planning, corporate retirement plan consulting and administration, and retail brokerage services.
On May 2, Midland States Bancorp, Inc. (NASDAQ:MSBI) announced that it had partnered with LendingPoint, a fintech platform that provides financing solutions based on artificial intelligence models. The firm expects outstanding balances through this partnership to grow to $250 million.
Among the hedge funds being tracked by Insider Monkey, Connecticut-based investment firm AQR Capital Management is a leading shareholder in Midland States Bancorp, Inc. (NASDAQ:MSBI), with 103,629 shares worth more than $2.9 million.
At the end of the first quarter of 2022, 10 hedge funds in the database of Insider Monkey held stakes worth $11 million in Midland States Bancorp, Inc. (NASDAQ:MSBI), up from 8 in the previous quarter worth $15 million.
7. StepStone Group Inc. (NASDAQ:STEP)
Number of Hedge Fund Holders: 11
Market Cap as of May 25: $1.66 billion
StepStone Group Inc. (NASDAQ:STEP) is a New York-based investment firm. Some of the investment products it specializes in include direct, fund of funds, secondary direct, and secondary indirect investments. The firm typically invests between $15 million and $200 million in companies that have enterprise value ranging from $150 million to $25000 million. Between 5% to 40% of the investments are made in emerging markets. However, the focus of the main investments remains the United States and North America.
StepStone Group Inc. (NASDAQ:STEP) posted earnings for the third fiscal quarter in early February, reporting a revenue of more than $410 million, up close to 66% compared to the revenue over the same period last and beating estimates by $263 million.
Among the hedge funds being tracked by Insider Monkey, New York-based investment firm Millennium Management is a leading shareholder in StepStone Group Inc. (NASDAQ:STEP), with 236,885 shares worth more than $7.8 million.
At the end of the first quarter of 2022, 11 hedge funds in the database of Insider Monkey held stakes worth $48 million in StepStone Group Inc. (NASDAQ:STEP), compared to 19 in the previous quarter worth $113 million.
6. SunCoke Energy, Inc. (NYSE:SXC)
Number of Hedge Fund Holders: 15
Market Cap as of May 25: $675 million
SunCoke Energy, Inc. (NYSE:SXC) is an Illinois-based raw material processing and handling company. The company posted earnings for the first quarter of 2022 on May 2, reporting earnings per share of $0.35, beating market estimates by $0.18. The revenue over the period was $439 million, up more than 22% compared to the revenue over the same period last year and beating analysts’ expectations by $67 million. The firm expects adjusted earnings to be in the $240 million to $255 million range in 2022.
In early February, B Riley analyst Lucas Pipes maintained a Buy rating on SunCoke Energy, Inc. (NYSE:SXC) stock and raised the price target to $11 from $10, noting the firm was “well positioned to further reduce leverage and turn towards greater capital returns to shareholders”.
At the end of the first quarter of 2022, 15 hedge funds in the database of Insider Monkey held stakes worth $60 million in SunCoke Energy, Inc. (NYSE: SXC), compared to 16 in the preceding quarter worth $63 million.
Among the hedge funds being tracked by Insider Monkey, New York-based investment firm Renaissance Technologies is a leading shareholder in SunCoke Energy, Inc. (NYSE: SXC), with 2.9 million shares worth more than $26 million.
In addition to Morgan Stanley (NYSE:MS), Intel Corporation (NASDAQ:INTC), and U.S. Bancorp (NYSE:USB), SunCoke Energy, Inc. (NYSE:SXC) is one of the stocks that hedge funds are monitoring as inflation rises.
In its Q4 2021 investor letter, Steel City Capital, an asset management firm, highlighted a few stocks and SunCoke Energy, Inc. (NYSE:SXC) was one of them. Here is what the fund said:
“SunCoke Energy, Inc. (NYSE:SXC) owns five cokemaking facilities in the U.S. capable of producing 4.2 million tons per annum (mtpa) of blast furnace coke. Coke is a key raw material used in the process of producing steel via the blast furnace method. In addition to its cokemaking operations, SXC owns a collection of marine terminals, the largest of which is the Convent Marine Terminal (CMT) in Louisiana. CMT has the capacity to transload 15 mtpa of coal and other industrial materials. In 2020, CMT accounted for 55% of U.S. thermal coal exports from the U.S. Gulf Coast and 15% of total U.S. thermal coal exports.
While the broader steelmaking industry recently benefitted from all-time high steel prices, resulting in record production levels, growing cash flow, and improving balance sheets, SXC has continued to trade with a free cash flow yield in excess of 20%, reflecting considerable concern about the company’s prospects. I believe there is a broad misunderstanding of the SXC story driven in part by shallow analysis of the company’s business model and cash flow prospects. I believe fair market value ranges from $14-$17, representing upside of 84-122% from current levels. What’s more, SunCoke Energy, Inc. (NYSE:SXC) represents an attractive takeout target for industry-consolidator Cleveland Cliffs (CLF), which at a minimum provides downside protection, but also offers a potential catalyst for value realization in the future. ” (Click here to see the full text)
5. Hanmi Financial Corporation (NASDAQ:HAFC)
Number of Hedge Fund Holders: 15
Market Cap as of May 25: $694 million
Hanmi Financial Corporation (NASDAQ:HAFC) operates as a bank holding firm. Some of the services it offers include non-interest-bearing checking accounts, interest-bearing checking and savings accounts, negotiable order of withdrawal accounts, money market accounts, and certificates of deposit. The company runs 35 full-service branches and 8 loan production offices across the United States. It was founded in 1982 and is headquartered in Los Angeles. It employs over 500 people.
Hanmi Financial Corporation (NASDAQ:HAFC) has been paying a dividend to shareholders consistently for the past eight years. On April 28, it declared a quarterly dividend of $0.22 per share, in line with previous. The forward yield was 3.71%.
At the end of the first quarter of 2022, 15 hedge funds in the database of Insider Monkey held stakes worth $30 million in Hanmi Financial Corporation (NASDAQ:HAFC), up from 14 in the previous quarter worth $24 million.
Among the hedge funds being tracked by Insider Monkey, New York-based investment firm Millennium Management is a leading shareholder in Hanmi Financial Corporation (NASDAQ:HAFC), with 246,805 shares worth more than $6 million.
4. Holley Inc. (NYSE:HLLY)
Number of Hedge Fund Holders: 19
Market Cap as of May 25: $1.15 billion
Holley Inc. (NYSE:HLLY) operates as an automotive performance firm. On May 12, the firm posted earnings for the first quarter of 2022, reporting earnings per share of $0.19, beating analysts’ expectations by $0.04. The revenue over the period was $200 million, up over 24% year-on-year and beating market expectations by $7.4 million. Tom Tomlinson, the CEO of the firm, revealed during the earnings call that organic sales had increased by $21.6 million in the period.
On March 4, Jefferies analyst Anna Glaessgen assumed coverage of Holley Inc. (NYSE:HLLY) stock with a Buy rating and a price target of $20, noting that the quarterly results of the firm showed demand for the product sales.
At the end of the first quarter of 2022, 19 hedge funds in the database of Insider Monkey held stakes worth $130 million in Holley Inc. (NYSE:HLLY), up from 17 in the preceding quarter worth $110 million.
Among the hedge funds being tracked by Insider Monkey, New York-based investment firm P2 Capital Partners is a leading shareholder in Holley Inc. (NYSE:HLLY), with 3.6 million shares worth more than $50 million.
In its Q3 2021 investor letter, Baron Funds, an asset management firm, highlighted a few stocks and Holley Inc. (NYSE:HLLY) was one of them. Here is what the fund said:
“During the quarter, we added to our position in Holley Inc. (NYSE:HLLY), which traces its roots back to 1903, but recently came public via a SPAC merger with Empower Ltd. Holley is a leading designer, marketer, and manufacturer of high-performance automotive aftermarket products for car and truck enthusiasts, selling 60 iconic brands across many categories and car models. They are the market leader in the space with around $600 million in sales, #1 or #2 market positions in all their major categories (i.e., electronic fuel injection, carburetors), and 3 times the size of their closest competitor. These scale benefits enable Holley Inc. (NYSE:HLLY) to outspend on R&D to continuously innovate with unmatched go-to market capabilities to drive above industry growth. Holley’s Direct-To-Consumer strategy is a core focus, engaging its loyal customer base and transforming the sector with a consumer-first approach driven by innovation (approximately 40% of sales from products introduced in the last five years).
Since 2001, Holley’s core market has grown at a 6.5% CAGR as more than 50 million Americans see their vehicle as more than a means of transportation, 15 million of whom are considered avid enthusiasts. These enthusiasts spend a great deal of time (on average, more than 10 hours per week) and money pursuing their vision of a perfect vehicle, often leading to heightened levels of repeat spending. (Click here to read full text)
3. Tanger Factory Outlet Centers, Inc. (NYSE:SKT)
Number of Hedge Fund Holders: 19
Market Cap as of May 25: $1.82 billion
Tanger Factory Outlet Centers, Inc. (NYSE:SKT) owns and runs open-air upscale outlet shopping centers. The firm has interests in 38 centers of this kind that are spread across 20 states in the United States. These centers host over 2,700 stores that are operated by more than 500 different brand name companies. The firm was founded in 1981 and is based in North Carolina. It employs close to 500 people. The firm also has a small presence outside the US, primarily in neighboring Canada.
Tanger Factory Outlet Centers, Inc. (NYSE:SKT) has an impressive dividend history stretching back over 27 years. On April 11, the company declared a quarterly dividend of $0.20 per share, a 10% increase from the previous dividend of $0.1825 per share. The forward yield was 4.69%.
At the end of the first quarter of 2022, 19 hedge funds in the database of Insider Monkey held stakes worth $121 million in Tanger Factory Outlet Centers, Inc. (NYSE:SKT), up from 18 the preceding quarter worth $89 million.
Among the hedge funds being tracked by Insider Monkey, Boston-based investment firm Capital Growth Management is a leading shareholder in Tanger Factory Outlet Centers, Inc. (NYSE:SKT), with 1.3 million shares worth more than $23 million.
In its Q4 2021 investor letter, Altron Capital Management, an asset management firm, highlighted a few stocks and Tanger Factory Outlet Centers, Inc. (NYSE:SKT) was one of them. Here is what Factory Outlet Centers, Inc. t the fund said:
“SKT’s business has recovered nicely from its pandemic lows, although the effect of the Omicron variant is yet to be determined. Otherwise, it appears that Tanger Factory Outlet Centers, Inc. (NYSE:SKT) still sees strong demand from consumers with foot traffic having largely returned to pre-pandemic levels. Rent spreads have finally started ticking upward, increasing 240 basis points in the third quarter. Occupancy has also rebounded to 94.3%. While most metrics are up, it seems that retailers’ willingness to expand and open new stores remains muted due to uncertainty surrounding COVID and the broader economy. In the meantime, management is making some strategic shifts to better position the company’s outlets in this type of environment. One such change in direction involves increasing the presence of food & beverage services across its outlets. We think this is a positive strategic decision that allows Tanger Factory Outlet Centers, Inc. (NYSE:SKT) more options in bringing in strong, long-term tenants to replace short-term popups and tenants lost to the pandemic. We remain bullish on SKT’s recovery and management’s ability to execute.”
2. Genworth Financial, Inc. (NYSE:GNW)
Number of Hedge Fund Holders: 21
Market Cap as of May 25: $2 billion
Genworth Financial, Inc. (NYSE:GNW) provides insurance products. The company posted earnings for the first quarter of 2022 on May 3, reporting earnings per share of $0.25, beating analyst expectations by $0.01. The revenue over the period was $1.89 billion. The firm also announced a $350 million share repurchase program a day prior to releasing the earnings. The firm said it expected to fund the repurchase through holding company capital and future cash flow generation, as well as dividends from Enact ownership.
Genworth Financial, Inc. (NYSE:GNW) offers products through in-house sales representatives and digital marketing programs. Some of the products offered include variable annuity, variable life insurance, and corporate-owned life insurance.
Among the hedge funds being tracked by Insider Monkey, North Carolina-based investment firm Shah Capital Management is a leading shareholder in Genworth Financial, Inc. (NYSE:GNW), with 11.5 million shares worth more than $43 million.
At the end of the first quarter of 2022, 21 hedge funds in the database of Insider Monkey held stakes worth $129 million in Genworth Financial, Inc. (NYSE:GNW), compared to 19 in the preceding quarter worth $128 million.
In its Q4 2021 investor letter, Gator Capital Management, an asset management firm, highlighted a few stocks and Genworth Financial, Inc. (NYSE:GNW) was one of them. Here is what the fund said:
“We own positions in both Enact Holdings and its parent company, Genworth Financial, Inc. (NYSE:GNW). Enact is one of six mortgage insurance companies. Mortgage insurance is purchased by borrowers to protect lenders if the borrower defaults on their mortgage. The government mortgage agencies (“GSEs”) require mortgage insurance when the borrower has a down payment of less than 20% of the home’s purchase price. Usually, first-time homeowners are the largest users of mortgage insurance since they often have the most difficult time accumulating enough savings for a 20% down payment. We believe the demand for mortgage insurance will be strong, but the mortgage insurance companies’ stocks are priced as though future earnings will not grow.
Here is our investment thesis on Genworth Financial, Inc. (NYSE:GNW):
Genworth Financial
We also own shares of Enact’s parent company Genworth Financial. We think Genworth is more attractive than Enact. Here is our investment thesis on Genworth:
- Leveraged return on Enact – Genworth’s main asset is the 132 million shares of Enact it still holds. Genworth also has about $1 billion of net debt at its holding company, so it is a leveraged version of Enact. If Enact stock increases in value, Genworth should increase a greater percentage due to the leverage at Genworth’s holding company.
- Two other assets held – Genworth has two other assets that we believe are not reflected in Genworth’s stock price. Currently, Genworth trades for approximately the value of its stake in Enact less its net debt. The two other assets Genworth owns are:
- Tax-sharing arrangement – Genworth Financial, Inc. (NYSE:GNW) has a tax-sharing arrangement with its subsidiaries. Since Genworth has past losses, it does not pay federal income taxes. Regulators allow Genworth’s subsidiaries to send tax payments to the holding company for liabilities created by the subsidiaries’ current income. However, the holding company can retain these cash tax payments because it has the tax shield from past losses. This tax-sharing arrangement allows Genworth to get cash out of the subsidiaries without asking regulators to allow dividend payments. In 2021, Genworth received $375 million in tax-sharing payments from its subsidiaries. We conservatively estimate Genworth could receive $200 million per year for the next five years. This amount would equal $2 per share, which is significant considering Genworth’s stock is only priced at $4.
- Life insurance subsidiary – Genworth also owns a life insurance subsidiary. The life insurance subsidiary is a large company on its own, but we assign zero value to this subsidiary because of potential losses in its long-term care insurance business. However, we observe that Genworth’s management team has done a very good job raising rates on its long-term care policies to counteract increasing policy costs. There is some possibility that 10 years from now, management’s actions could salvage some value from this subsidiary. If this subsidiary has any value, it could be so large that it would be meaningful to the stock price. For example, if the subsidiary is eventually worth half of its current $11 billion of book value (or $5.5 billion) then this subsidiary could be worth almost $11 per share. This potential scenario is far down the road, so currently we conservatively assign zero value to this asset in our valuation of Genworth…” (Click here to see the full text)
1. Vista Outdoor Inc. (NYSE:VSTO)
Number of Hedge Fund Holders: 21
Market Cap as of May 25: $2.1 billion
Vista Outdoor Inc. (NYSE:VSTO) markets consumer products in the sports and recreation sector. In early May, the company announced that the board of directors had agreed to a plan to seperate the outdoors and sports units into two separate entities. The tax-free spinoff is expected to be complete by 2023 and will have advantages like enhanced strategic focus, expanded strategic opportunities, and tailored capital allocation priorities, according to a statement made by the company.
In early February, Roth Capital analyst Matt Koranda maintained a Buy rating on Vista Outdoor Inc. (NYSE:VSTO) stock and lowered the price target to $57 from $61, backing the firm to “continue to benefit from a sustained ammo up-cycle for the next few quarters”.
At the end of the first quarter of 2022, 21 hedge funds in the database of Insider Monkey held stakes worth $326 million in Vista Outdoor Inc. (NYSE:VSTO), compared to 25 in the preceding quarter worth $460 million.
Among the hedge funds being tracked by Insider Monkey, New York-based investment firm Gates Capital Management is a leading shareholder in Vista Outdoor Inc. (NYSE:VSTO), with 5.4 million shares worth more than $195 million.
In its Q2 2021 investor letter, ClearBridge Investments, an asset management firm, highlighted a few stocks and Vista Outdoor Inc. (NYSE:VSTO) was one of them. Here is what the fund said:
“Our Strategy outperformed with strong results from consumer discretionary stocks like Vista Outdoor Inc. (NYSE:VSTO). Vista Outdoor Inc. (NYSE:VSTO), a manufacturer of a wide range of products serving the outdoor sports and recreation markets, also performed well in the period on continued demand and growing margins.”
You can also take a peek at 12 Best Environmental Stocks to Invest In and 10 Best Nickel Stocks to Buy Now.
Follow Insider Monkey on Twitter
Suggested Articles:
- 10 Best Automotive Stocks to Invest in Now
- 10 Best Self Driving Car Stocks to Invest In
- 10 Best Renewable Energy Stocks to Buy According to Hedge Funds
Disclosure. None. 10 Small-Cap Stocks to Buy During Recessions is originally published on Insider Monkey.
