- Small-cap stocks stand out as an undervalued segment of the broader market, offering the best growth stories to investors.
- Movado Group (MOV): The watchmaker’s gross profit margin soared to 59% of sales, despite rising costs and supply chain challenges.
- Perion Network (PERI): The digital advertising company boasts a strong market position in the premium ads segment, and management is projecting a 32% increase in revenue for 2022.
- RPC (RES): Higher prices for oil and gas continue to drive higher oil field activity, leading to growing revenue and profitability.
While U.S. small-cap stocks have outpaced their larger-capitalization peers over the past two decades, they currently stand out as an undervalued segment of the broad market. Year-to-date (YTD), the Russell 2000 index has plunged by 18%. On the other hand, the S&P 500 index declined by 14% over the same period.
Analysts point out that U.S. small-cap stocks can offer exposure to secular growth themes. They also provide diversification. Technology and health care companies make up roughly half of the Russell 2000 index. Meanwhile, industrial and consumer discretionary shares account for around 30% of the index.
However, small-cap stocks tend to be more domestically-focused and therefore highly sensitive to economic developments in the U.S. For instance, sluggish economic growth, rising inflation, and interest rate hikes typically lead weaker balance sheets and tighter profit margins.
For instance, a report by Goldman Sachs highlighted that the Russell 2000 could continue to lag the benchmark S&P 500 in 2022. The study suggests that “…the small-cap index has underperformed on average during periods where either the yield curve was flattening, economic growth was elevated and declining, or financial conditions were tightening. All three of these dynamics describe our economists’ 2022 outlook.”
Therefore, potential investors need to research these companies well before hitting the “buy” button. With that information, here are the three leading small-cap stocks that deserve your attention.
Our first small-cap stock is Movado (NYSE:MOV). It designs and distributes fine watches around the globe. Its diversified brand portfolio includes Movado, Concord and Ebel as well as several licensed brands.
Movado reported fourth-quarter fiscal 2022 results on March 24. Revenue increased 16% year-over-year (YOY) to $206 million. Adjusted diluted earnings per share stood at $1.32 compared to 84 cents a year ago. Cash and equivalents ended the period at $277 million.
The group noted strong demand through its retailing partners and e-commerce platform. Management noted that demand has shifted toward the premium segment. As a result, the gross profit margin soared to almost 59% of sales despite supply chain challenges and surging costs.
Movado projects revenue for the new fiscal year to increase to a range of $780 million to $800 million, up roughly 8% YOY. Yet, despite the positive outlook, MOV stock has declined more than 16% YTD. Passive income investors may be interested to know the current price supports a dividend yield of 3.8%.
Shares are trading at 1.2 times current sales. Meanwhile, the 12-month median price forecast for Movado Group stands at $43.
Perion Network (PERI)
Israel-based Perion Network (NASDAQ:PERI) is a technology company that offers digital advertising solutions. Its customers are brands, agencies and publishers. It operates an intelligent hub that connects ad buyers and sellers.
Perion released Q1 2022 results on April 28. Revenue jumped 40% YOY to $125 million. Adjusted diluted earnings per share were 44 cents compared to 19 cents a year ago. Cash and equivalents ended the period at $342.5 million.
Management also raised its financial guidance for 2022. It anticipates a 32% increase in revenue YOY.
The platform offers unique features such as customizable backgrounds, QR scans and in-game ads during sports events. The acquisition of video content management platform Vidazoo is expected to boost revenue as it adds a key solution to enhance its advertising offerings.
However, PERI stock has dropped 16% YTD. As a result, shares now offer better value at 15 times forward earnings and 1.7 times current sales. At present, the 12-month median price forecast for Perion Network is at $32.
Our final small-cap stock is RPC (NYSE:RES), which provides a range of oilfield services as well as equipment for oil and gas companies across the globe.
RPC announced Q1 2022 results on April 27. Revenue soared 56% YOY to $284.6 million due to increasing demand, favorable pricing and a more extensive fleet of pressure pumping equipment.
Diluted earnings per share came in at 7 cents compared to a 5-cent loss per share in the prior-year quarter. Cash and equivalents ended the year at $73.2 million.
Analysts have noted the number of rigs in operation has more than doubled between August 2020 and January 2022. Meanwhile, the U.S. domestic rig count increased 61% YOY to 636 in Q1 2022. Higher prices for oil and gas continue to drive oil field activity, leading to growing revenue and profitability.
To shareholders’ delight, RES stock has soared more than 100% YTD. It is trading at 2.2 times current sales. Finally, the 12-month median price forecast for RPC stands at $10.
On the date of publication, Tezcan Gecgil did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.