Small caps have had it a little rough this year. After surging
in 2012 and 2013, the small cap Russell 2000 index has fallen more
than -4% so far this year and is down over -8% from its all-time
high. This is despite large cap indexes like the S&P 500 and
the Dow Jones Industrial Average holding steady through most of the
year and even recently hitting new all-time highs.
There are many possible explanations for this "risk-off" move by
investors. Fed tapering. Geopolitical uncertainty. Global economic
There is also the possibility that some of these stocks simply got
too far ahead of their fundamentals, and now the market is
reassessing their valuations. This could explain why value stocks
have held up much better than their growth counterparts within the
small cap space.
Focus on the Fundamentals
It looks like gains are going to be much harder to come by going
forward than they were in the recent past, particularly for small
cap stocks. If investors want to have success in this market
environment, they need to pay close attention to the fundamentals.
Things like valuation, earnings momentum, cash flow and balance
sheet strength - which were all but ignored last year - are
becoming important to the market again.
With this in mind, I ran a screen in
looking for small cap stocks with strong fundamentals, including:
- Reasonable price-to-earnings and price-to-cash flow
- Solid earnings momentum, with a Zacks Rank of 1 (Strong Buy),
2 (Buy) or 3 (Hold),
- Strong balance sheets with low debt levels and healthy
- Attractive returns on invested capital, and
- Year-to-date returns greater than the S&P 500.
4 Solid Small Caps Beating the Market
Here are 4 names from the list:
Standard Motor Products
Standard Motor Products manufactures and distributes replacement
parts for motor vehicles in the automotive aftermarket industry
with an increasing focus on the original equipment service market.
It has a market cap of $959 million.
The company's "Engine Management" segment manufactures ignition and
emission parts, ignition wires, battery cables, fuel system parts
and sensors for vehicle systems. Its "Temperature Control" segment
manufactures and remanufactures air conditioning compressors, air
conditioning and heating parts, engine cooling system parts, power
window accessories, and windshield washer system parts.
Standard Motor Products delivered better-than-expected first
quarter results on May 1 as it turned a modest sales increase into
double-digit earnings growth through expanding profit margins.
Analysts revised their 2014 estimates higher after the Q1 beat,
sending the stock to a Zacks Rank #2 (Buy). Based on current
consensus estimates, analysts project 14% EPS growth for SMP this
year and 12% growth next year.
Standard Motor Company carries virtually no long-term debt and
consistently generates positive free cash flow and double-digit
returns on invested capital. With shares trading at a reasonable
15x 12-month forward earnings and 10x trailing 12-month operating
cash flow, there could be plenty of upside left in this stock.
Genesco is a specialty retailer that sells footwear, headwear,
sports apparel and accessories in more than 2,550 retail stores and
leased departments through brands like Journeys and Lids. It is
headquartered in Nashville, Tennessee and has a market cap of $1.8
Genesco consistently generates solid cash flow and double-digit
returns on invested capital. It also has a healthy balance sheet
with very little long-term debt.
Earnings momentum has been stable with Genesco beating earnings in
18 out of the last 20 quarters. Based on current consensus
estimates, analysts are calling for 9% earnings per share growth
this year and 13% growth next year. With shares trading at a very
reasonable 11x cash flow and 13x forward earnings, this solid small
capper should continue to hold up well this year.
United Insurance Holdings Corp
United Insurance Holdings Corp is a holding company that focuses
primarily on providing homeowners' insurance in Florida, South
Carolina, Massachusetts, Rhode Island and North Carolina. It is
headquartered in St. Petersburg, Florida and has a market cap of
Shares of UIHC have held up well so far this year. Perhaps one
reason for this is because of a huge Q1 earnings beat on April 30,
thanks in part to improved loss and expense ratios. The company
reported EPS of 65 cents, more than doubling the Zacks Consensus
Estimate of 32 cents. This prompted analysts to revise their
estimates significantly higher for both 2014 and 2015.
UIHC has a solid balance sheet with very little debt. And its $338
million investment portfolio is invested mainly in corporate and
government bonds. Over the last 12 months, UIHC has generated a
return on invested capital of 18.5%. The stock looks attractive at
just 10x forward earnings and 10x cash flow.
Universal Electronics develops and manufactures a broad line of
pre-programmed universal remote control products, audio-video
accessories, and software that are marketed to enhance home
entertainment systems. Its customers include subscription
broadcasters (i.e., DIRECTV), original equipment manufacturers
("OEMs"), international retailers, private labels, and companies in
the computing industry. Approximately 63% of its sales came from
outside the U.S. in the first quarter of 2014. It has a market cap
of $645 million.
Universal Electronics delivered a big earnings beat on May 1,
driven by double-digit sales growth and S,G&A expense leverage.
This prompted analysts to revise their estimates significantly
higher for both 2014 and 2015, sending the stock to a Zacks Rank #1
(Strong Buy). Based on current consensus estimates, analysts
project 32% EPS growth this year and 11% growth next year.
Universal Electronics also has a very solid balance sheet with no
long-term debt. And shares trade at less than 16x forward earnings
and 15x cash flow. Looks like there is plenty of upside potential
left for UEIC.
The Bottom Line
If investors want to have success in this market environment, they
need to pay close attention to the fundamentals. These 4 companies
each have solid fundamentals and are well positioned for additional
gains in 2014.
Todd Bunton, CFA is the Growth & Income Stock Strategist
and Editor of the
Income Plus Investor service
Want More of Our Best Recommendations?
Zacks Executive VP, Steve Reitmeister, knows when key trades are
about to be triggered and which of our experts has the hottest
hand. Then each week he hand-selects the most compelling trades and
serves them up to you in a new program called
Want the latest recommendations from Zacks Investment Research?
Today, you can download 7 Best Stocks for the Next 30 Days.
Click to get this free report
GENESCO INC (GCO): Free Stock Analysis Report
STANDARD MOTOR (SMP): Free Stock Analysis
UNIVL ELECTRS (UEIC): Free Stock Analysis
UTD INSURANCE (UIHC): Free Stock Analysis
To read this article on Zacks.com click here.