If you’re looking for small-cap growth stocks to buy an excellent place to start is by checking out the top holdings of small-cap growth ETFs such as the SPDR S&P 600 Small Cap Growth ETF (NYSEARCA:SLYG).
SLYG isn’t the largest small-cap growth ETF — that award goes to the Vanguard Small-Cap Growth ETF (NYSEARCA:VBK) with $13.6 billion in total net assets — but I like it because it’s got approximately half the holdings of VBK, making the culling of ideas that much easier.
However, with $2.5 billion in total net assets, it’s not exactly suffering from investor neglect.
The companies that make SLYG have higher than average sales growth over three years, the net three-year earnings growth divided by the current share price, and a higher than average 12-month price change.
Based on those criteria, the ETF has come up with 336 stocks. So I’ve whittled it down to three small-cap growth stocks to buy now. The three selections are all from SLYG’s top 25.
e.l.f. Beauty (ELF)
e.l.f. Beauty (NYSE:ELF) is the 20th-largest position in SLYG, with a weighting of 0.76%.
The company, which stands for Eyes, Lips, and Face, has a market cap of $4.0 billion. Although it’s above the traditional definition of small-cap stocks — FINRA defines small caps as stocks between $250 million and $2 billion — it’s not unusual for small-cap ETFs to own stocks with market caps above the ceiling and below the floor.
It’s all about delivering positive returns for investors.
The company ran its first Super Bowl commercial this year starring Jennifer Coolidge (known for her role as Stifler’s mom in the American Pie movies) and written by Mike White (creator of the HBO series White Lotus and SHADOW, the company’s long-time creative marketing and communications agency).
When e.l.f. Beauty went public in September 2016 at $17; it had annual revenue of $230 million. In 2022, it expects revenues of at least $478 million and adjusted net income of $59 million. In 2023, it expects sales growth of 38.5% at the midpoint of its guidance.
While its stock is more expensive than at any point since it went public, you have to pay up for this kind of growth from a quality company.
Mueller Industries (MLI)
Mueller Industries (NYSE:MLI) is the 13th-largest position in SLYG with a 0.85% weighting.
Mueller Industries dates back to 1917. Today, the manufacturer of copper, brass, aluminum, and plastic products to the plumbing, HVAC, and refrigeration end markets has $4.0 billion in annual revenue as of Dec. 31, 2022.
The best part of the company’s November 2022 presentation if you’re a conservative investor is the first point on pg. 3. It states, “Profitable throughout all economic cycles.” Who doesn’t like owning a piece of a recession-resistant, 106 year-0ld profitable company?
The company’s strong profitability (44% return on invested capital) has led to excellent total shareholder returns. Between 2008 and 2021, it averaged 16% compound annual growth. So if you invested $10,000 at the beginning of 2008, at the end of 2021, it would have been worth nearly $80,000.
Its balance sheet is in excellent shape, enabling it to withstand anything unexpected in the economy in 2023 while also having the cash to jump on the appropriate acquisition opportunities.
It’s cheap, with an earnings yield of nearly 16%, double its five-year average. Up more than 25% in 2023, it’s just getting started.
Ensign Group (ENSG)
Ensign Group (NASDAQ:ENSG) is the seventh-largest position in SLYG with a 0.52% weighting.
If you’ve owned this stock for the past five years, you’ve done well. The provider of post-acute care and other healthcare services has seen its stock appreciate by 268%, eight times SLYG, and five times the S&P 500.
On Feb. 1, the company announced it closed on its purchase of the operations at 20 skilled nursing facilities in California ranging in size from 49 beds to 148.
It signed triple-net leases between 18 and 20 years with the owner of the properties, Sabra Health Care REIT (NASDAQ:SBRA). In addition, it will sublease three of the properties to another healthcare services provider.
As a result of its latest move, it has operations at 286 properties across 13 states. Twenty-six of the properties also have senior living facilities.
In 2022, Ensign earned $235.7 million ($4.14 a share) on $3.0 billion in revenue. As you can see, it’s not an easy business to make money from, which is a blessing and a curse. To make more money, it’s got to keep adding properties and beds to its roster.
For example, in 2022, its gross margin was 17%. Autodesk (NASDAQ:ADSK), which just laid off 250 people, has a 90% gross margin. Kroger (NYSE:KR), which operates grocery stores, an industry known to have extremely low margins, has a 22% gross margin.
So, the curse is that it’s not easy to make money in this business; the blessing is that very few will try, and even fewer will be successful. Ensign Group is the latter.
On the date of publication, Will Ashworth 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.