In this article, we discuss 10 small-cap stocks to buy during recessions. If you want to read about some more small-cap stocks to buy during recessions, check out 5 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)
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Disclosure. None. 10 Small-Cap Stocks to Buy During Recessions is originally published on Insider Monkey.
