3 Incredible Small-Cap Value Stocks For Your Portfolio

Value investing has always been a popular strategy, and with good reason too. After all, who minds stocks that have low P/Es, solid outlooks and decent dividends?

Specifically, for investors who are risk-averse, value investing offers an opportunity to enter the market and grab stocks that have otherwise been overlooked by a majority of investors, and are thus trading at cheap multiples. Thus, investing in small-cap value asset class might just fit the bill for such investors.

Small-Cap Value Potential

Owing to their significant growth potential, small-cap stocks (stocks with a market cap of around $1 billion or below) usually tend to outperform their large-cap peers over time. However, these can also be riskier than well-known large-cap companies. Nonetheless, the growth potential of small-caps given the current economic backdrop of continued strength in the US dollar and oil price unpredictability is tempting.

Moreover, over the long run, value stocks tend to outperform their growth-oriented counterparts. This is because growth stocks have a propensity of possessing high valuations fueled by positive outlook for future growth. Thus, it might become difficult for such a stock to grow as much as its undervalued counterpart.

We thus believe investing in small-cap value stocks could actually be a safer bet as these stocks generally yield high returns and generate exponential gains over time. Moreover, taking into account that such stocks are far more volatile in nature, they possess far higher potential for price appreciation.

3 Small-Cap Value Stocks to Bet On

With the help of our new style score system, we have identified three small-cap stocks that have excellent prospects and might prove to be a boon for value investors.

Our Value Style Score condenses all valuation metrics into one actionable score that helps investors steer clear of ‘value traps’ and identify stocks that are truly trading at a discount. Our research shows that stocks with Style Scores of ‘A’ or ‘B’ when combined with a Zacks Rank #1 (Strong Buy) or 2 (Buy) offer the best upside potential.

To arrive at the best value picks, we first short-listed stocks that combine a Zacks Rank #1 with a Value Style Score of ‘A.’ Then, from among them, we selected those with dividend yield of over 2% and finally zeroed in on three stocks that have a market cap of under $2 billion.

General Cable Corporation (NYSE:BGC)

The company is a leading developer, designer, manufacturer, marketer and distributor of copper, aluminum and fiber optic wire and cable products for the communications, energy and electrical markets. General Cable has an annual dividend yield of 3.94%.

The company possesses a P/E of 16.94 and P/S of 0.16. Compared to the industry at large, this is pretty favorable as the overall space has an average P/E and P/S of 19.05 and 1.03, respectively. Further, over the last four quarters, General Cable has delivered an impressive average positive earnings surprise of 87.75%.

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Navios Maritime Midstream Partners LP

The company engages in owning, operating and acquiring crude oil tankers, refined petroleum product tankers, chemical tankers and liquefied petroleum gas tankers under long-term employment contracts. It currently provides an annual dividend yield of 3.48%.

Right now, Navios has a forward P/E of 13.37. Compared to the industry at large this too is favorable as the overall space has an average P/E of 15.57. Moreover, for full year 2015, EPS is estimated to grow at a whopping 907.69% while revenues are expected to deliver an impressive growth rate of 109.1%.

American Railcar Industries Inc (NASDAQ:ARII)

The company is a leading North American manufacturer of covered hopper and tank railcars. American Railcar also leases railcars to third parties. Additionally, it offers railcar repair services, engineering and field services and fleet management services. The stock has a decent annual dividend yield of 2.80%.

The company possesses a P/E of 10.23 and P/S of 1.46. Compare this to the industry average of 15.57 and 1.93, respectively, and it will be safe to consider American Railcar as adequately undervalued compared to many of its peers, at least on the basis of these metrics.

For the current quarter, four earnings estimates at American Railcar have moved higher compared to zero downward revisions over the past 30 days. The trend has been pretty favorable too, with estimates increasing from $1.28 a share 30 days ago, to $1.45 today – a rise of 13.3%. Moreover, for full year 2015, EPS is estimated to grow at 15.64% and revenues at 27.5%.

The Bottom Line

Nevertheless, for investors looking at good value investments, price should not be the only criterion. This is because a stock’s price is not practically as indicative of its value as its earnings growth, P/E ratio or P/S metrics are. So, we advise investors to look beyond stocks in the limelight, and invest instead in these hidden gems, that too at throwaway prices, banking on the Zacks' style score system.

Original post

Written By: Zacks Investment Research