Small–cap stocks are considered to be more volatile and riskier than large–cap stocks, but they also offer the potential for greater growth. In terms of timing we believe this is a great time to buy certain small cap stocks as they are relatively more shielded from the effects of strong US dollar, and they trade at a bigger discount. Many small–cap stocks are young companies with innovative products or services that are just beginning to gain traction in the marketplace. While there are no guarantees in the stock market, investing in small–cap stocks can be a rewarding experience for investors who are willing to take on a little more risk.
“Small-Caps Are Really Well Positioned For This Environment”
On November 1 Nancy Prial, Co-CEO and senior portfolio manager at Essex Investment Management, appeared in an interview on CNBC where she discussed why “small-caps are really well positioned for this environment”. Nancy Prial noted that she sees a “hard landing” as opposed to a “deep recession” and that “the U.S. economy will look better and be stronger than most of the other economies, particularly those in western Europe” due to the Russian-Ukraine conflict. Here are some comments from Nancy Prial:
“We think small-caps are really well positioned for this environment because they are leveraging the domestic economy, and more importantly, they are leveraging the industrial economy which we believe will be leading in growth for not only the next year but for the next decade… Small-caps are still extraordinarily cheap, in fact, they are selling at valuations on both an absolute and relative basis that are similar to when they were selling back at the 1999-2000 point…”
Nancy Prial noted that small-caps are more attractively valued and “under-owned” as compared to their large-cap counterparts and that she sees the “valuation discount, better growth prospects, and lack of ownership” of small-cap companies “puts them in a great position to appreciate as earnings come through”. Nancy Prial sees small-caps driving outperformance in 2023, here is her bull case for small-caps:
“Small caps have been outperforming their larger brethren over the most recent period. They outperformed in October, they outperformed in September, and they outperformed in the second quarter. A lot of that is due to the valuation and the fact that the earnings are coming through. They are more domestically oriented, so the dollar has been less of a headwind for them…”
As of November 4, the Dow has tanked 11.43% year to date, the S&P 500 has lost 21.39% since the beginning of 2022, and the Nasdaq is down 33.84% for the year. Stocks are getting hammered, bond yields are going up, and the dollar is showing no signs of weakness. However, long-term investors can capitalize on the recent share price weakness by investing in quality businesses while they still trade at discount levels. This article will review some of the best small-cap stocks to invest in which include The ODP Corporation (NYSE:ODP), Herbalife Nutrition Ltd. (NYSE:HLF), and Algoma Steel Group Inc. (NASDAQ:ASTL).
Source:Pixabay
Our Methodology
To determine the best small-cap stocks to buy now, we screened for small-cap companies that were profitable, cash-rich, and held leading positions in their respective industries. We picked the 10 best small-cap stocks based on business fundamentals, growth catalysts, and overall market sentiment. Along with each stock, we have mentioned the hedge fund sentiment and analyst ratings. These stocks are ranked according to their popularity among elite hedge funds.
Top Investors’ Stock Portfolio: 10 Small-Cap Stocks To Buy
10. Heidrick & Struggles International, Inc. (NASDAQ:HSII)
Market Cap as of November 4: $544.18 Million
Number of Hedge Fund Holders: 13
Heidrick & Struggles International, Inc. is a leading staffing and employment services company that provides executive search, consulting, and on-demand talent services to businesses and business leaders worldwide. On October 24, Heidrick & Struggles International, Inc. declared a quarterly cash dividend of $0.15 per share. The dividend is payable on November 18 to stockholders of record on November 4. As of November 4, the stock is trading at a PE multiple of 7x and is offering a forward dividend yield of 2.19%. Heidrick & Struggles International, Inc. is included among the top investors’ stock portfolio.
On October 26, Barrington analyst Kevin Steinke revised his price target on Heidrick & Struggles International, Inc. to $38 from $45 and maintained an Outperform rating on the shares.
At the end of Q2 2022, 13 hedge funds were eager on Heidrick & Struggles International, Inc. and disclosed stakes of $98.3 million in the company. Of those, Renaissance Technologies was the leading shareholder in the company and held a position worth $42.2 million.
Smart money investors are pouring into some promising small-caps which include The ODP Corporation, Herbalife Nutrition Ltd., and Algoma Steel Group Inc..
9. Ruth’s Hospitality Group, Inc. (NASDAQ:RUTH)
Market Cap as of November 4: $640.67 Million
Number of Hedge Fund Holders: 13
Ruth’s Hospitality Group, Inc. develops, operates, and franchises fine dining restaurants in the United States. On November 4, Ruth’s Hospitality Group, Inc. released earnings for the fiscal third quarter of 2022. The company reported earnings per share of $0.16 and generated a revenue of $112.74 million, ahead of Wall Street estimates by $1.71 million. Ruth’s Hospitality Group, Inc. is one of the small-cap stocks that make up the top investors’ stock portfolio.
Shortly after the company’s earnings release, Stephens analyst Joshua Long revised his price target on Ruth’s Hospitality Group, Inc. to $20 from $22 and maintained an Overweight rating on the shares.
Ruth’s Hospitality Group, Inc. has a strong cash position and knows how to direct its resources efficiently. The company has free cash flows of $24.15 million and on August 5, the company announced that its board of directors has approved a new share buyback program for the repurchase of up to $60 million worth of the company’s common shares.
At the close of Q2 2022, Ruth’s Hospitality Group, Inc. was a part of 13 investors’ portfolios that held positions worth in total of $91 million. As of June 30, Hill Path Capital is the top shareholder in Ruth’s Hospitality Group, Inc. and has stakes worth $48.3 million in the company.
8. Embecta Corp. (NASDAQ:EMBC)
Market Cap as of November 4: $1.69 Billion
Number of Hedge Fund Holders: 13
Embecta Corp. (NASDAQ:EMBC) is a leading global medical device company that offers a range of solutions for diabetic individuals. The company was recently spun off Becton, Dickinson, and Company (NYSE:BDX) and has now become a pure-play diabetes company. The company’s products include pen needles, syringes, and safety devices, among other products that can aid diabetic patients. Shares of Embecta Corp. have pulled back in 2022 and are presenting an optimal buying opportunity. The stock is trading at a PE multiple of 5x, as of November 4, and is offering a forward dividend yield of 2.06% to shareholders. The company has a strong cash position and has free cash flows of $410.9 million. The stock is ranked among the top investors’ stock portfolio.
On August 1, Morgan Stanley analyst Cecilia Furlong took coverage of Embecta Corp. with an Equal Weight rating and a $33 price target. On September 8, BTIG analyst Marie Thibault took coverage of Embecta Corp. with a Neutral rating.
At the close of Q2 2022, 13 hedge funds were long Embecta Corp. and held stakes worth $197.3 million in the company. This is compared to 1 position in the preceding quarter with stakes worth $712,000. As of June 30, Sessa Capital is the largest investor in Embecta Corp. and has a position worth $91.8 million in the company.
Here is what Madison Funds had to say about Embecta Corp. in its second-quarter 2022 investor letter:
“During the quarter, we exited Embecta Corp. (NASDAQ:EMBC) and initiated a position in Nike. We received shares in Embecta as a result of Becton Dickinson spinning-off its Diabetes Care segment. In our assessment, Embecta was fairly valued, so we decided to exit the holding.”
7. Beazer Homes USA, Inc. (NYSE:BZH)
Market Cap as of November 4: $343.71 Million
Number of Hedge Fund Holders: 15
Beazer Homes USA, Inc. (NYSE:BZH) is among the largest homebuilders in the United States and is ranked among the top investors’ stock portfolio. The company is profitable and efficient at making profits for shareholders. Beazer Homes USA, Inc. has a trailing twelve-month operating margin of 10.13% and an ROE of 23.83%. The stock is currently trading at an attractive valuation and is presenting an optimal entry point for investors. As of November 4, Beazer Homes USA, Inc. has a trailing twelve-month PE ratio of 1.86.
On October 18, B. Riley analyst Alex Rygiel revised his price target on Beazer Homes USA, Inc. to $15 from $19 and maintained a Buy rating on the shares.
At the end of Q2 2022, Beazer Homes USA, Inc. was spotted on 15 investors’ portfolios. These funds held collective stakes of $32.5 million in the company, up from $28.2 million in the previous quarter with 14 positions. The hedge fund sentiment for the stock is positive.
As of June 30, Millennium Management is the top shareholder in Beazer Homes USA, Inc. and has a position worth $6.2 million.
6. Materion Corporation (NYSE:MTRN)
Market Cap as of November 4: $1.48 Billion
Number of Hedge Fund Holders: 16
Materion Corporation (NYSE:MTRN) is a global provider of advanced engineered materials and serves a wide range of growth industries including semiconductors, aerospace, defense, consumer electronics, and energy among others. On October 28, Materion Corporation declared a quarterly cash dividend of $0.125 per common share, payable on December 8 to investors of record on November 16. As of November 4, the stock is offering a forward dividend yield of 0.69% and is ranked among the top investors’ stock portfolio.
On October 18, KeyBanc analyst Philip Gibbs updated his price target on Materion Corporation to $94 from $100 and reiterated an Overweight rating on the shares.
At the end of Q2 2022, 16 hedge funds held stakes in Materion Corporation. The total value of these stakes amounted to $140.6 million. This is compared to 16 hedge funds in the previous quarter with stakes worth $119.2 million.
As of June 30, ACK Asset Management is the largest shareholder in Materion Corporation and has disclosed stakes of $30.9 million in the company.
In addition to Materion Corporation, other top small-cap stocks that are on investors’ radars include The ODP Corporation, Herbalife Nutrition Ltd., and Algoma Steel Group Inc..
5. Genco Shipping & Trading Limited (NYSE:GNK)
Market Cap as of November 4: $626.18 Million
Number of Hedge Fund Holders: 16
Genco Shipping & Trading Limited is a shipping company that owns and operates dry bulk carrier vessels. The company transports iron ore, coal, grain, steel products, and other dry bulk cargoes along worldwide shipping routes. Genco Shipping & Trading Limited is trading at bargain levels and is offering an attractive buying opportunity. The company is trading at a PE multiple of 2x and is offering a forward dividend yield of 13.50%. The company has free cash flows of $125.2 million. Genco Shipping & Trading Limited is ranked high on the top investors’ stock portfolio.
This September, Stifel analyst Benjamin Nolan took coverage of Genco Shipping & Trading Limited with a Buy rating and a $20 price target. On October 10, B. Riley analyst Liam Burke revised his price target on Genco Shipping & Trading Limited to $27 from $31 and maintained a Buy rating on the shares.
At the end of Q2 2022, 16 hedge funds were bullish on Genco Shipping & Trading Limited and held stakes worth $142.4 million in the company. Of those, Centerbridge Partners is the top shareholder in the company and has a position worth $88.18 million.
4. Daseke, Inc. (NASDAQ:DSKE)
Market Cap as of November 4: $340.38 Million
Number of Hedge Fund Holders: 17
Daseke, Inc. (NASDAQ:DSKE) is an American trucking company that provides transportation and logistics solutions in the United States, Canada, and Mexico. The company operates through two business segments: Flatbed Solutions and Specialized Solutions. Daseke, Inc. has a strong cash position and is efficient at utilizing its resources. Daseke, Inc. has free cash flows of $77.6 million and on September 30, the company announced that its board of directors has authorized a share buyback program of $40 million of the company’s outstanding common stock. The stock is ranked on the top investors’ stock portfolio.
On July 28, Stifel analyst Bert Subin upgraded Daseke, Inc. to Buy from Hold and reiterated his $10 price target on the shares.
At the close of Q2 2022, Daseke, Inc. was a part of 17 investors’ portfolios that held collective stakes of $54.3 million in the company. Of those, Alta Fox Capital Management was the leading investor in the company and held a position worth $14.2 million.
3. Herbalife Nutrition Ltd. (NYSE:HLF)
Market Cap as of November 4: $1.59 Billion
Number of Hedge Fund Holders: 28
Herbalife Nutrition Ltd. is a global company that sells weight-loss and nutritional products through a network of independent distributors. The company was founded in 1980, and its headquarters are in Los Angeles, California. On October 31, Herbalife Nutrition Ltd. announced earnings for the fiscal third quarter of 2022. The company reported an EPS of $0.91 and beat estimates by $0.11. The company generated a revenue of $1.30 billion for the quarter.
This November, Citi analyst Chasen Bender updated his price target on Herbalife Nutrition Ltd. to $26 from $30 and reiterated a Buy rating on the shares. On November 1, B. Riley analyst Jeff Van Sinderen revised his price target on Herbalife Nutrition Ltd. to $31 from $38 and maintained a Buy rating on the shares. The stock is ranked third on the top investors’ stock portfolio.
At the end of Q2 2022, 28 hedge funds were long Herbalife Nutrition Ltd. and held stakes worth $893.7 million in the company. Of those, Route One Investment Company was the top investor in the company and disclosed a position worth $221.7 million.
2. The ODP Corporation (NYSE:ODP)
Market Cap as of November 4: $1.94 Billion
Number of Hedge Fund Holders: 32
The ODP Corporation is a leading provider of office products and services, including office supplies, technology products and solutions, business machines and related services, and office furniture. The ODP Corporation has a strong cash position and has free cash flows of $99 million. The stock is currently trading at an attractive valuation and, as of November 4, has a trailing twelve-month PE ratio of 11.21. The ODP Corporation is ranked high among the top investors’ stock portfolio.
In addition to having a strong cash position, The ODP Corporation reinvests in itself. On November 2, The ODP Corporation announced that its board of directors has authorized a share buyback program of $1 billion, available through 2025.
At the end of Q2 2022, 32 hedge funds disclosed ownership of stakes in The ODP Corporation and held collective stakes of $372.8 million in the company. As of June 30, HG Vora Capital Management is the largest investor in The ODP Corporation and holds a position worth $151.2 million in the company.
1. Algoma Steel Group Inc. (NASDAQ:ASTL)
Market Cap as of November 4: $770.14 Million
Number of Hedge Fund Holders: 45
Algoma Steel Group Inc. is a leading North American producer and provider of steel products. Algoma Steel Group Inc. is one of the stocks that are a part of the top investors’ stock portfolio. Algoma Steel Group Inc. is profitable, cash-rich, and efficient at making profits for shareholders. The company has a trailing twelve-month operating margin of 37.58% and an ROE of 107.75%. Algoma Steel Group Inc. has free cash flows of over C$1.19 billion and, as of November 4, is awarding investors with a forward dividend yield of 2.72%.
This September, BMO Capital analyst David Gagliano revised his price target on Algoma Steel Group Inc. to C$14 from C$16 and maintained an Outperform rating on the shares. On October 20, Stifel analyst Ian Gillies updated his price target on Algoma Steel Group Inc. to C$10.75 from C$11.25 and reiterated a Hold rating on the shares.
At the close of Q2 2022, Algoma Steel Group Inc. was a part of 45 investors’ portfolios that held collective positions worth $446 million in the company. As of June 30, Contrarian Capital is the top shareholder in Algoma Steel Group Inc. and has stakes worth $74 million in the company.
Here is what Nordstern Capital had to say about Algoma Steel Group Inc. in its third-quarter 2022 investor letter:
“The world is short on raw materials and energy. Nordstern Capital has increased its exposure to raw materials and energy. Recession fears may temporarily suppress demand and prices. The fundamental issue, however, is a sustainable lack of supply, caused by decade-long underinvestment. The shortages cannot be resolved in the short to medium term.
Currently suppressed stock prices offer a wonderful opportunity for our commodity businesses to buy back their own shares. For instance, Algoma Steel Group (NASDAQ:ASTL) reduced its diluted share count this year from 177 million to 111 million. Nonetheless, ASTL’s share price has come down 50%, because US HRC steel prices per ton declined in the past year from $2,000 to currently $713. Today, ASTL has $500m in net cash and a market capitalization of about $700m. The company is profitable even in the current recessionary environment. The CFO expects annual mid-cycle free cash flow generation greater than the current ASTL enterprise value. This is one illustrative example. ASTL is not alone. Many present-day commodity businesses are cash and earnings rich and can use weak stock prices for aggressive buybacks.”
You can also take a look at 12 Biggest Glass Companies in the World and 15 Biggest EV Companies in the World.
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This article is originally published at Insider Monkey.
