A rising tide lifts all boats.It's one of the great sayings
about the impact of a bull market. But what this pearl of wisdom
fails to convey is how different groups of stocks respond to that
movement in different ways.
That has once again been on display in the strong market of
2013. The S&P 500 Index is up 19% on the year, but the
iShares Core Small Cap ETF (NYSE:
has gained an outsize 28%. With the market going "risk-on" this
year, small-cap stocks and growth stocks have logged a strong
Those big gains shouldn't come as a surprise to investors who
have been following small caps for the past dozen years. While
the S&P 500 is up just 23% since 2001, small caps have
returned an eye-popping 235%. Take a look at the amazing
divergence in the chart below.
There's no question that small caps are risky and can be very
volatile. Inevitably, some will declare bankruptcy and go out of
business. But in the long run, these smaller companies have
tremendous upside that most blue-chip stocks have long
But just because small caps have been surging and offer the
potential for outsized gains doesn't mean investors have to pay
ridiculous valuations for a chance at growth. In fact, there are
plenty of small cap, growth stocks trading deep into value
territory. Below is a list of 7 of the best.
From the group, I have chosen to highlight
Cash America (NYSE:
because shares are being artificially compressed due to overblown
regulatory concerns and
Sonic Automotive (NYSE:
because of its unique combination of growth and value.
A specialty financial services company that offers pawn and
payday loans, Cash America owns and operates more than 1,000
locations in the United States and Mexico. In the slow-growth
economy of the past four years, Cash America has been surging, up
183% since bottoming out in the spring of 2009. But in spite of
those impressive gains, analysts remain optimistic on growth,
calling for earnings growth of 17% in 2014.
The company's forward price-to-earnings (P/E) ratio of just 11
times is a big discount for a small-cap, growth stock. That lower
valuation has partially been driven by ongoing concerns about a
restrictive regulatory environment in which lawmakers are
attempting to crack down on high-interest lending. But that has
yet to have a material impact on the company's business, as
earnings continues to grow. And as a market leader in a growth
industry with high margins and barriers to entry, Cash America is
a buy anywhere below $50.
has been stealing all the headlines in the auto industry, a group
of little-known dealerships has quietly been surging behind the
scenes. That includes Sonic, up a market-crushing 73% in the past
two years. Looking forward, Sonic -- the owner of more than 100
dealerships in 14 states -- still has plenty of upside.
Earnings are expected to grow 16% this year, 13% next year and
an average of 24% annually in the next five years. That strong
earnings growth has Sonic trading deep into value territory in
spite of big gains on the chart. The company's forward P/E of 12
is a 25% discount to its peer average of 16. On the chart, shares
have been pressuring the key $24 level for most of the year and
appear to be in position to break out. Sonic is a buy below
Risks to Consider:
Small caps are typically much more volatile than their large
cap counterparts. In regard to Cash America, regulatory
uncertainty remains a concern. Although that has yet to have a
real impact on earnings, new legislation or regulatory
initiatives should be watched closely.
Action to Take -->
Small caps continues to outperform the S&P 500. But even
though these high-growth companies have seen big gains, there are
still plenty of small caps that look undervalued. From the group,
consider Cash America because shares are being artificially
compressed due to overblown regulatory concerns and Sonic
Automotive because of its unique combination of growth and value.
That makes Cash America is a buy anywhere below $50 and Sonic is
a buy below $27.50.
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