I happen to love value stocks. I also happen to love small-cap stocks, because they have the greatest chance of delivering market-beating returns over the long-term.
However, new investors, intermediate investors and conservative investors tend to avoid small-cap stocks, as they feel safer with large-cap plays.
The problem is that many “blue chip” stocks are wildly overvalued, and in my opinion, offer significant downside risk that are no worse than well-chosen small-cap stocks. These are the kind of unloved, undiscovered stocks that can return multiples of your investment. Small-cap stocks also often sell off extremely hard because of medium-term setbacks, providing just the kind of fear and discounts that great buys are made of.
While a host of small-cap stocks have market-beating potential going forward, here are nine that I especially like right now. In no particular order …
Small Caps to Buy: Ashford Hospitality Trust, Inc. (AHT)
AHT Market Cap: $575 million
There is no reason why Ashford Hospitality Trust (AHT) stock should be trading at $6 per share, which is two-thirds of its pricing from its 2013 initial public offering.
Ashford has an outstanding portfolio of hotels, well-diversified across geography and brand, continues to generate excellent returns on its investment, and pays a sustainable and solid dividend that currently yields 8%. The yield is about double what it should be based on the levels the stock previously was at, meaning AHT is worth at least double ($12).
Management is the best there is, with the CEO’s 26 years of experience in hotels, and with the highest insider ownership in the entire sector.
This is a classic case of the market mispricing one of the best small caps out there. And markets don’t misprice stocks forever.
Small Caps to Buy: Enova International Inc (ENVA)
ENVA Market Cap: $215 million
Its online, state-by-state licensed payday lending operation was going gangbusters, with astonishing growth. However, the Consumer Financial Protection Bureau decided to kill payday lending with onerous rules, and the U.K. cracked down on the product as well, so investors bailed, to the point where a stock that was above $30 in 2014 now trades between $6 and $7.
For a monoline operator, this might normally signal death. Enova’s great strength, however, is its robust analytics, underwriting savvy and deep understanding of consumer lending needs. It is in the midst of a turnaround by transitioning to more palatable regulatory products here and abroad.
I believe Enova can be a $20 stock in three years.
Small Caps to Buy: OneMain Holdings Inc (OMF)
OMF Market Cap: $3.7 billion
Similar to Enova, OneMain Holdings (OMF) — created from the merger of OneMain and Springleaf — used to be a big mortgage lender, and then got destroyed in the housing crisis.
OMF is now a juggernaut consumer lender whose market cap actually qualifies as a mid-cap depending on which financial encyclopedia you happen to have at your desk. OneMain has ample credit to lend, and ample customers seeking that credit.
OMF is somewhat similar to Enova in terms of the markets it is going after … and in fact, since OneMain does not have an online unit, a purchase of Enova is not out of the question.
The company is digesting the Springleaf merger now, so the market has punished it for that reason. Yet I also think the market thinks OMF is subject to CFPB assault. I think that’s unlikely. OneMain doesn’t do payday lending, and its products meet the criteria that the CFPB has usually announced as what consists of a reasonable loan product.
Small Caps to Buy: Carter’s, Inc. (CRI)
CRI Market Cap: $5.3 billion
Carter’s (CRI) isn’t a beaten-down small cap for sure. In fact, it’s barely a small-cap at all, again wavering between small-cap and mid-cap territory.
However, I consider it to be the Starbucks Corporation (SBUX) of baby clothing.
With both of my kids, when they were tiny, we did much of our shopping at Carter’s because it had quality merchandise at low prices (OK, not like Starbucks there). Then I realized that kids grow like weeds, so we were constantly back in the store, buying the next size up … and Carter’s was the default choice, much like Starbucks is for those seeking a place to meet.
Carter’s has a brand name with more than 900 stores in North America that enjoys not only repeat customers from those with little kids, but a constantly replenishing consumer base, as people keep having babies.
Small Caps to Buy: Smith & Wesson Holding Corp (SWHC)
SWHC Market Cap: $1.5 billion
Gunmaker Smith & Wesson (SWHC) is trading near all-time highs, but it can also be a volatile stock. It already has a solid base of consumers, and research shows that once someone buys a single gun, they often return to buy others — as many as seven.
Smith & Wesson is also making a big push into selling to military and law enforcement, to try to replace the Beretta as the sidearm of choice for the latter.
Americans love their guns, and that’s not going to change. Smith & Wesson will go higher from here, but I actually suggest waiting for the stock to fall below $20 before jumping in. I think the bear market we are in is going to drive it down before it moves too much higher.
Small Caps to Buy: EZCorp Inc (EZPW)
EZPW Market Cap: $150 million
I’ve been wrong on this stock before, so be warned.
EZCorp (EZPW) was destroyed by a combination of factors. The sole voting shareholder inexplicably cleaned management house a few years ago and put in dolts who ridiculously overpaid for online lending assets that made no money.
Those people were replaced by management that had more experience but who could not stem the tide of a collapsing gold market which harmed its overseas pawn operations, and have since been replaced yet again.
The good news is that with the stock at only $3, EZPW can’t go much lower. The company is now focused strictly on domestic and Mexican pawn operations, which alone are worth more than $6 per share.
Small Caps to Buy: PRA Group Inc (PRAA)
PRAA Market Cap: $1.5 billion
This pick has a contingency associated with it. The CFPB must be gutted, which could happen under a GOP president, even Donald Trump.
PRA Group (PRAA), formerly Portfolio Recovery Associates, is a debt collector, which purchases charged-off debts and then collects on them very successfully. However, creditors have been reluctant to sell debt because they know the CFPB has set up very strict compliance rules, so it has dried up a lot of potential purchases, and the CFPB doesn’t like debt collectors in general.
PRAA has lost two-thirds of its value, which I believe would be totally recoverable if the CFPB goes away.
Small Caps to Buy: Heartland Express, Inc. (HTLD)
HTLD Market Cap: $1.6 billion
Heartland Express (HTLD) is dealing with a double whammy.
First, Heartland does business in trucking — a sector that is not benefiting like one would hope given low oil prices. Sure, HTLD is up a nice 11% this year against a down market, but consider that follows a 2015 in which Heartland fell roughly 40% in an almost straight line — again, in a declining-/low-oil-price environment.
Second, HTLD trucks a lot of commodities, which have cratered in a deflationary cycle.
However, commodities will eventually recover, as will trucking. And Heartland itself has a solid balance sheet with no long-term debt and plenty of operating cash flow.
Small Caps to Buy: iPath Bloomberg Copper Subindex Total Return Sub-Index ETN (JJC)
JJC Assets Under Management: $32 million
OK, the iPath Bloomberg Copper Subindex Total Return Sub-Index ETN (JJC) is not a small-cap stock, it’s an exchange-traded note — but it does have a small-enough asset pool to qualify.
Copper has been hit hard, thanks in large part to slowing economic growth in China, but I think you can open a position in JJC around $25-27. Its last low was about $19 in the housing crisis before tripling a couple of years later.
Patience should reward investors who pick up shares cheaply here.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. He has 20 years’ experience in the stock market, and has written more than 1,200 articles on investing. He also is the Manager of the forthcoming Liberty Portfolio. Lawrence Meyers can be reached at [email protected]. As of this writing, he was long AHT, ENVA and EZPW.