While large- and mega-cap stocks are often the most headline-friendly, it’s small- and mid-cap stocks that offer real value to individual investors. That’s precisely because many of those small-cap stocks aren’t put at risk by widely read headlines. This creates opportunities for savvy investors who know where to look.
These quality companies, often with profitable and sustainable niches, might not be well-known to most investors, but they’re are treasured by their shareholders. As such, the securities presented in this article are small-cap stocks that look like “hidden gems.”
All 10 should be at the top of the list for an investor looking for value in the small- and mid-cap universes. These are excellent companies, most with long track records of creating value for shareholders.
And all ten should continue to create that value for years to come.
10 Small-Cap Hidden Gems: Brunswick Corporation (BC)
Some investors might know the Brunswick Corporation (NYSE:BC) brand from its billiards and bowling operations (even though Brunswick sold the bowling business in 2015). Most almost certainly know the company’s stable of marine brands. Mercury engines reportedly have the leading market share in outboard engines. Bayliner, Meridian and Boston Whaler all are among the most respected boat brands in the U.S. — and beyond.
Meanwhile, Brunswick continues to build a fitness equipment business, targeting rehab facilities and senior living centers to balance the cyclicality in boating. And it’s working. Adjusted EPS in 2017 is guided between $4 to $4.10, almost double 2012 levels of $2.09. Brunswick continues to take share in both its boat and engine businesses, and the fitness business is growing both organically and through acquisitions.
And yet, a world-class industry leader is available for about 14x 2017 earnings after a somewhat odd post-earnings selloff this week. With the boating industry still catching up from a glut of used boats created after the housing crisis, Brunswick should profit. And so should Brunswick stockholders.
10 Small-Cap Hidden Gems: Armstrong Flooring Inc (AFI)
Armstrong Flooring Inc (NYSE:AFI) was spun off from Armstrong World Industries Inc (NYSE:AWI) last year. Unlike many spinoffs, AFI stock went straight up post-spin. (Many spin-offs see early selling pressure from funds that owned the parent, but cannot own the spun entity due to fund restrictions.)
But a somewhat disappointing fourth-quarter report took the wind out of AFI’s sails, and under $18 the stock is near post-election lows. It looks as if investors have somewhat forgotten about AFI, but it’s a stock worth paying attention to. Luxury vinyl tile sales are growing double-digits, and that category has years of growth left.
Larger rival Mohawk Industries, Inc. (NYSE:MHK) is pushing the product to retailers like Home Depot Inc (NYSE:HD) and Lowe’s Companies, Inc. (NYSE:LOW), and smaller Armstrong should benefit.
Meanwhile, AFI trades at under 7x Ebitda on an enterprise basis, and cost cuts should help margins. Investors might want to let the stock settle down a bit, particularly amid recent weakness, but from a long-term standpoint, AFI looks like an intriguing play.
10 Small-Cap Hidden Gems: AV Homes Inc (AVHI)
The homebuilders sector as a whole still looks reasonably valued — particularly for investors optimistic the strength in housing has a few years left. And of that group, AV Homes Inc (NASDAQ:AVHI) looks particularly intriguing.
Like Brunswick, AVHI saw a modest selloff coming out of Q2 earnings. Also like Brunswick, the issue was with expectations, not results. AV Homes actually handily beat Wall Street’s consensus. But considering that AVHI gained 35% between the beginning of June and mid-July, investors likely were expecting more.
As a result of that decline, however, investors get a second chance to buy AVHI stock. The company’s markets in North Carolina, Arizona and Florida all look strong. A recent acquisition strengthened the company’s positioning in the Raleigh-Durham metro, one of the fastest-growing markets in the country.
Yet, AVHI actually trades at a discount to book value, and less than 14x 2018 EPS estimates. Even in a space that’s relatively cheap, those multiples look attractive. And so does AVHI stock.
10 Small-Cap Hidden Gems: Blue Buffalo Pet Products (BUFF)
Shares of Blue Buffalo Pet Products Inc (NASDAQ:BUFF) haven’t done all that well on the public markets. BUFF went public a little over two years at $20, and closed its first day above $27. The stock now trades below $23.
But, for the most part, Blue Buffalo has done its part. A lawsuit with Nestle SA (ADR) (OTCMKTS:NSRGY) caused disruption, and a number of recalls haven’t done the brand any favors. But sales continue to grow, and Blue Buffalo remains a leader in the high-end/natural area of the pet food space.
Earnings, meanwhile, continue to rise, with 2017 guidance implying a 17% increase in EPS at the midpoint. Yet BUFF trades at less than 25x that guidance, a multiple in line with many consumer goods companies growing at a much slower rate.
BUFF probably isn’t an explosive growth story, given low-single-digit growth in pet food overall, and intense competition in the “natural” category. But the company’s current growth trajectory simply doesn’t seem reflected in a stock price not far from a 52-week low.
10 Small-Cap Hidden Gems: Cirrus Logic (CRUS)
Cirrus Logic, Inc. (NASDAQ:CRUS) might not be that hidden at this point. Many investors know the company as a key supplier to Apple Inc. (NASDAQ:AAPL). Indeed, Apple drove 79% of Cirrus Logic’s FY17 revenue, and Samsung another 15%.
That leaves Cirrus Logic dependent on Apple — and perhaps perilously so. But it also makes CRUS an intriguing “backdoor play” on the more well-covered Apple. Cirrus Logic’s audio chips should be able to maintain their presence in the iPhone, given that improved audio is one of the key areas where improvements continue.
And the company is making inroads with lower-cost Chinese OEMs, which gives it a growth opportunity beyond the iPhone that Apple itself traditionally hasn’t had.
With CRUS priced reasonably cheap at about 13x 2017 EPS plus cash, investors bullish on AAPL could see CRUS as a complementary play. And if Cirrus Logic can add new sources of revenue, it could even outperform its much better-known customer.
10 Small-Cap Hidden Gems: SPX Flow (SPX)
Unlike Armstrong Flooring, industrial equipment manufacturer SPX Flow Inc (NYSE:FLOW) took the more traditional route after being spun off by SPX Corp (NYSE:SPXC) in 2015. Shares fell quickly post-spin; FLOW stock lost almost 60% of its value by the time it hit a February 2016 bottom.
That trend finally reversed, with FLOW better than doubling from those lows. But it still looks as if the market hasn’t fully caught up with the SPX Flow story. FLOW does trade at about 27x 2017 EPS guidance … but at just about 12x free cash flow guidance. More cost savings are coming in 2018, and debt reduction should further help free cash flow going forward.
There are some cyclical effects here, so investors interested in FLOW need some confidence in the U.S. macro environment. But SPX Flow does seem to have more upside; at least, once more of the market fully understands the story here.
10 Small-Cap Hidden Gems: Federal Signal Corp. (FSS)
Federal Signal Corporation (NYSE:FSS) manufactures street sweepers and sewer cleaners for (mostly) municipal customers, while also offering communications and security products to colleges, communities, and first responders. Like many companies on this list, Federal Signal might not have the sexiest product portfolio on the market. But its markets offer stable demand, and there’s room for upside in FSS stock.
A recent acquisition of Truck Bodies and Equipment International, for $270 million, is a big move for $1.1 billion FSS. And it seems like a good one, diversifying the company further into industrial end markets and boosting earnings. Federal Signal will become a deleveraging story after the deal, which combined with synergies could create a multi-year benefit from the purchase.
Betting on M&A can be a bit risky, and FSS is at its highest levels in over a decade. But there’s reason to see more upside ahead. Clearly, the more the market understands the TBEI deal, the more it likes it.
10 Small-Cap Hidden Gems: KMG Chemicals (KMG)
KMG Chemicals, Inc. (NYSE:KMG) may not be as under covered as it used to be, even with just a $600 million market cap. Shares hovered around $20 for most of the decade before taking off early last year; they would clear $60 before a recent pullback after fiscal Q3 results in early June.
That pullback came despite a strong quarter, with adjusted EPS rising 29% to a new record. The semiconductor market, a key end market for KMG products, looks strong, with companies like Nvidia Corporation (NASDAQ:NVDA) and Micron Technology, Inc. (NASDAQ:MU) posting strong growth. Elsewhere, sales of chemicals for treating wood and industrial lubricants are both showing growth as well.
Yet, KMG trades for just 16x FY18 EPS estimates, despite its size and growth making it a potential acquisition target. KMG has had a big run — but I don’t think that run has come to an end quite yet.
10 Small-Cap Hidden Gems: Grand Canyon Education (LOPE)
For-profit college operators like Grand Canyon Education Inc (NASDAQ:LOPE) have had a rough go of it the past few years. Aggressive recruiting practices and high drop-out rates led the Obama Administration to increase regulatory scrutiny. “Gainful employment” and “90/10” regulations, among others, squeezed profits.
And an improving economy further hurt demand, leading a few colleges (like ITT and Corinthian) into bankruptcy and hammering the stock prices of the survivors.
Through all that bad news for the industry, however, LOPE has simply kept growing. In fact, LOPE has been one of the better performers in the entire market, and a clear best-in-breed for-profit education stock. The company’s campus in Phoenix, Arizona continues to grow, as does enrollment both online and in-person. Grand Canyon now has Division I athletics, the only for-profit university ever to do so.
Fundamentally, earnings continue to rise steadily, while student satisfaction improves at the same time. Grand Canyon long has been the exception to the rule in for-profit education, both as an institution and as a stock. And it seems likely that will continue to be the case.
10 Small-Cap Hidden Gems: Standex International Corporation (SXI)
Standex Int’l Corp. (NYSE:SXI) is a classic, diversified manufacturing play. Standex makes everything from commercial freezers and toasters to observation vents for stealth fighters to electronic components.
But the most important thing Standex makes, as far as shareholders are concerned, is consistent profits. SXI has paid a dividend for 53 consecutive years, though it yields just 0.7% as of this writing. Profits have risen steadily coming out of the financial crisis, and are expected to continue to do so, with per-share earnings likely to clear $5 next year.
SXI isn’t necessarily cheap, trading at 21x this year’s expected earnings. But there’s a Warren Buffett-style “wonderful company at a fair price” argument here – for investors who know where to look.
As of this writing, Vince Martin has no positions in any securities mentioned.
