Small caps do well in a growing market.
And these seven top-rated small caps — Stonegate Bank (SGBK), Gray Television (GTN), Fidelity Southern (LION), Sucampo Pharmaceuticals (SCMP), Walker & Dunlop (WD), Universal Insurance (UVE) and Comfort Systems USA (FIX) — are already proving that this transitional economy is enough momentum to get them rolling.
Even taking into account the tough payroll numbers announced Friday, the U.S. is much closer to a rate hike than a rate cut. While unemployment is falling, it’s sitting at multi-year lows and has yet to rise. Consumer spending is growing, and companies are starting to look for opportunities again.
Each of these companies is built on U.S. growth; they’re not counting the U.S. dollar to weaken or the global economy to strengthen. This is about taking advantage of the recovery of the U.S. economy, which may be uneven at this point, but it’s headed in the right direction.
That point is reinforced by the fact that these seven represent a number of different industry sectors — financials, construction, healthcare and entertainment. There are many sources of growth in the current economy, and this is a great time to get into these stocks before they start moving in earnest.
Small-Cap Stocks: Stonegate Bank (SGBK)
Stonegate Bank (SGBK) is a South Florida bank that is in the middle of the real estate resurgence going on in the region.
As you recall, when the financial crisis hit in 2008, real estate was slammed. And in many cases, real estate prices continue to struggle just to get back to pre-crisis levels.
But that’s not the case for South Florida. With economic turmoil spreading in South America, many of the wealthier people have moved their money into Florida real estate and into U.S. dollars.
And SGBK has been a key beneficiary of this new influx of investors. It’s actually the first bank in the U.S. to have an account with the Cuban government.
While this is somewhat politically risky in the short term, it could prove a massive benefit to the bank in the long term, as relations between the U.S. and Cuba thaw and commerce between the two countries grows.
SGBK stock is up almost 20% in the past 12 months, but much of its growth lies in coming years; this is a great opportunity to get in before the crowds.
Small-Cap Stocks: Gray Television (GTN)
Gray Television (GTN) is taking the idea of “think globally, act locally” to heart. But more as a corporate strategy than a political mantra.
GTN owns and operates television stations in 45 markets across the U.S., but focuses on the South, Midwest and Southwest.
Almost in bankruptcy in 2008, GTN has made a remarkable comeback in recent years as it has set about acquiring stations around the nation and building a big presence in smaller markets.
In the past month, the company has spent more than half a billion on its two newest acquisitions. It paid $443 million for Schurz Communications, a radio and television broadcaster and newspaper publisher. Holdings include stations in Wichita, Kan.; Roanoke-Lychburg, Va.; Springfield, Mo.; South Bend Ind.; Augusta, Ga.; Anchorage Ala.; and Rapid City, S.D.
Its other transaction in September was the $100 million purchase of an ABC affiliate in Cedar Rapids, Iowa.
Both these acquisitions should begin to contribute to the bottom line immediately. This kind of growth is the key reason GTN is up more than 60% in the past year.
Small-Cap Stocks: Fidelity Southern (LION)
Fidelity Southern (LION) is a Georgia-based bank that does most of its business with its commercial and consumer customers in Georgia and Florida. It has mortgage operations in the Washington, D.C. metropolitan area as well as Virginia, South Carolina, North Carolina, and Alabama.
LION is pure play on all that’s good with a healthy financial institution in a low-interest rate environment and a gradually improving economy.
Housing starts are up, so its mortgage business is doing well. Low interest rates mean that LION is earning a nice margin on what it charges to lend. And its cash reserves are delivering nice growth since it’s borrowing from the government for next to nothing.
No, this isn’t some bank that’s about huge growth, massive acquisitions and busting into the top-tier banks. It’s a solid regional player that has built a very good business and continues to expand into good markets at a steady pace.
Sound boring? The stock is up almost 50% in the past year. If that’s what constitutes “boring,” I like boring.
Small-Cap Stocks: Sucampo Pharmaceuticals (SCMP)
Sucampo Pharmaceuticals (SCMP) has been a biotech on a tear. Well… up until a couple weeks ago, when the sector got punished after the Fed verbalized its concerns over global growth.
But even after that rout, the stock is still up 220% in the past year.
At this point, SCMP has one drug on the market, Amitiza, that address issues around irritable bowel syndrome and constipation.
This is a very good time for drugs like this, as chronic diseases and conditions are now more widely covered under the Affordable Care Act. Plus, given the graying of America, this type of drug is going to see a continued increase in use.
SCMP is also well ensconced in the Japanese market as well. And the “graying” demographics there are even more pronounced than they are in the U.S. Historically, the Japanese have generally suffered from digestive disorders a proportionally higher rate than their Western counterparts.
Use the recent selloff as a great entry point.
Small-Cap Stocks: Walker & Dunlop (WD)
Walker & Dunlop (WD) is up 94% in the past year and 55% year-to-date, which isn’t bad at all for a commercial real estate finance firm that has been around since 1937.
With offices located around the nation, WD is well positioned to take advantage of emerging growth anywhere it pops up.
With prices this low, many investors from around the world are looking to put their money into the U.S. real estate market as a safe haven. And pension funds from around the world are especially focused on buying office buildings in the U.S. as long-term investments.
It’s a great way to buy dollars with weaker currencies, especially when the real estate market hasn’t gotten back to its pre-financial crisis form.
The other ace in the hole for WD is the imminent rise in interest rates. Since the company finances new properties and developments, its margins will grow as interest rates rise.
WD still has a lot of potential left as money from Brazil, China, Russia and other nations continues to make its way to U.S. shores.
Small-Cap Stocks: Universal Insurance (UVE)
Universal Insurance (UVE) started as a Florida property & casualty (P&C) insurer. But now it has operations that span eight other states, and it’s represented by 7,000 independent insurance agents.
But Florida has been UVE’s lifeblood during this lukewarm market. It has also helped that UVE hasn’t had too much trouble with the weather in the past few years.
If it doesn’t have to pay out on claims, Universal can keep that money invested. And in a zero-interest-rate environment like the U.S. has been in for a decade now, UVE gets to pile up the cash. The money it gets from premiums doesn’t have to be distributed in claims, and its cash reserves are socked away in solid, liquid securities like U.S. Treasury bonds in case the company needs to access the cash quickly to pay claims. So the company just keeps making money.
And when rates rise, UVE is sure to make even more money.
UVE has three big things going for it right now: It continues to beat earnings expectations quarter after quarter; it will only become more successful when rates eventually rise; and, given those first two, it’s a prime acquisition target.
Small-Cap Stocks: Comfort Systems USA (FIX)
Comfort Systems USA (FIX) is a direct beneficiary of the commercial real estate sector.
As a broadly diversified and national industrial HVAC company, it gets on both sides of the growth. It retrofits older properties with newer, more efficient equipment. And it designs, builds and maintains new systems for new construction.
Given the fact that this isn’t the sexiest sector, it may come as a surprise to know that FIX stock is up more than 100% in the past year and almost 60% year to date. That kind of momentum is rare indeed for construction and engineering stocks in general.
But more companies are realizing that operating costs are one of the more significant expenses when it comes to long-term building costs. And while energy prices are low now, they certainly won’t be that way for the life of a building.
What’s more, as real estate investment trusts continue to buy up sector-specific buildings and operate them as investments of their own, the more crucial cost-efficient HVAC systems become.
This is a sector that will continue to grow, as long as businesses and governments continue to look for every penny of operating margin it can.