The past year hasn’t been very kind to small-cap stocks. Where their larger brethren, as measured by the S&P 500, are up 5% for the 12-month period, the small-cap Russell 2000 index lost 5%.
That’s because small-cap stocks feel the impact of higher interest rates more than bigger companies do. Highly dependent upon the capital markets to fuel their growth, rising interest rates end up consuming a larger percentage of sales and profits for small companies.
Yet from tiny acorns come mighty oaks. Some of the biggest, best-known stocks in the world were once small-cap stocks. Amazon (NASDAQ:AMZN) had a market valuation of about $300 million at its IPO. So did Walmart (NYSE:WMT). Small business is the engine that drives America forward.
Although the sector is going through a rough patch now, the following three companies are unstoppable small-cap stocks ripe for the picking in September.
American Eagle Outfitters (AEO)
Considering the state of the economy and the U.S. mall, recommending a retailer seems counterintuitive. But American Eagle Outfitters (NYSE:AEO) breaks the mold. Once just an apparel retailer best known for its logo clothing, it transformed into a clothing company in tune with today’s consumers.
In particular, its Aerie lingerie brand remains on track to become a $2 billion brand in just a few years. It recorded $1.5 billion in sales last year, and segment sales were 11% higher in the first quarter of 2023.
Aerie saw phenomenal growth during the pandemic and remains popular with consumers today. American Eagle extended that loyalty with its lingerie into a new activewear vertical, Offline by Aerie. The retailer looks to open as many as 15 more Offline stores this year (there are 34 standalone locations currently).
American Eagle also updated its outlook for the second quarter and now expects company revenues to be flat from a year ago. Prior guidance said it would be slightly down.
Even though the stock is up 40% over the past year, shares still look attractive. It trades at 15 times earnings estimates, a fraction of its sales, and just 12 times free cash flow. American Eagle Outfitters simply looks unstoppable.
Innovative Industrial Properties (IIPR)
Marijuana real estate investment trust (REIT) Innovative Industrial Properties (NYSE:IIPR) hasn’t had the same run of luck as the apparel retailer. It’s lost almost a fifth of its value in the last year.
Over the past three months, however, shares rallied 20% higher. There’s good reason to think the comeback it’s mounting will continue. The marijuana industry is struggling, but IIP should do just fine.
First, it owns, manages and leases properties for the medical marijuana industry. It doesn’t grow marijuana itself. The leases are long-term, over 15 years, giving it a reliable revenue stream. It owns 108 properties across 19 states with approximately 8.9 million rentable square feet.
IIP is also a triple net-lease REIT, which means its tenants pay for insurance, taxes, structural repairs and maintenance. That lifts a heavy burden from its shoulders. Still, some of its tenants are hurting. Rent collections slipped earlier in the year, though they bounced back to 98%.
Arguably the best reason to own IIP is its dividend. Like all REITs, it is required to pay out most of its profits as dividends. It currently yields 9.1% annually.
IIP also regularly increases the payout. Since its IPO in 2016, the marijuana REIT raised the distribution at a blistering 42% compounded annual growth rate. It likely won’t maintain that pace, but the trend should still be up. With the stock down, but returning to form, now is the time to buy in.
York Water (YORW)
If we’re talking about dividends, no discussion can be complete without including York Water (NASDAQ:YORW). This little-known water utility company provides clean water and wastewater services to almost 50 municipalities in south-central Pennsylvania. It began paying dividends over 200 years ago and hasn’t missed a payment since.
It’s an under-the-radar play that investors ought to find attractive for its consistency. It does grow by acquiring more customers, but revenue generally rises from rate increases authorized by regulators.
Plus, it’s hard to argue against the increases because water is so essential. People need the clean water York provides and they also must have their wastewater treated, too. York uses its revenue to upgrade and improve its infrastructure. That makes its rate-based growth more stable than electric utilities.
This is not a get-rich-quick stock by any means. You buy this for the long haul. Yet York is a solid company with superior gross, operating and net margins compared to virtually any other water utility.
So if you want a reliable, unstoppable dividend force of nature in your portfolio, York Water is certainly the one for you.
On the date of publication, Rich Duprey did not hold (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.
