4 Small Caps To Buy On the Dip
Zacks Investment Research | Oct 21, 2014 03:42AM ET
Small cap stocks had a tremendous run up in 2013. The Russell 2000 index, which measures the performance of the small cap segment of the U.S. equity universe, surged a remarkable 37% last year.
But 2014 has been a different story.
The Russell 2000 index is down nearly 6% year-to-date while the S&P 500 has risen 3%. It has also dropped about 10% from its high in early July, officially putting it in a "correction". And between September 3 and October 15, the Russell plunged more than 12%.
Panic Selling, But Signs of Life
While small caps were arguably long overdue for a correction, the latest selloff seemed to bring a lot of good companies down with it, as investors sold first and asked questions later. This is also known as panic selling.
But it looks like some investors have already begun swooping in to grab some deals as small caps have shown some signs of life recently. The Russell 2000 actually gained 2.8% last week despite 1% declines in both the Dow Jones Industrial Average and S&P 500.
One reason for this could be that smaller companies typically derive most of their revenue from the United States, where economic data has been relatively strong. So sluggish overseas growth will have much less on an effect on earnings for these firms.
While it's too early to tell if this recent rally has marked the turning point for small caps as a group, there are several stocks in this space that look attractive after the latest selloff.
Good Buying Opportunity
I ran a screen in Research Wizard that looked for stocks with market capitalizations less than $2 billion, trading at least 10% below their 52-week highs but that have recently seen positive earnings estimate revisions from analysts and are trading at reasonable prices. I also excluded companies that generate a high percentage of their sales from outside of the United States.
Here are 4 names from the list:
1. Greenbrier (NYSE:GBX)
Greenbrier manufactures railroad freight car equipment and provides wheel services, railcar refurbishment and parts, leasing and other services to the railroad industry. Just 12% of the company's total revenue came from outside of the U.S. in 2013. It has a market cap of $1.5 billion.
Greenbrier sold off heavily as the overall market fell, plunging more than 40% between September 26 and October 15. It has started to rebound but is still well off of its highs. Shares trade around 13x 12-month forward earnings despite strong growth projections and positive earnings momentum. Recent analyst reports have noted that the recent drop in oil prices likely is not enough to materially reduce U.S. shale production, so demand for tank cars and frac sand cars should remain strong. Greenbrier is a Zacks Rank #1 (Strong Buy) stock.
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2. Jamba (NASDAQ:JMBA)
Jamba is the parent of Jamba Juice Company, which has 857 company-owned and franchised Jamba Juice stores that primarily offers fruit smoothies and juices. Less than 6% of its stores are located outside of the United States. It has a market cap of $224 million.
Jamba is down more than 12% since early September despite strong earnings momentum. Shares trade at 18x 12-month forward earnings. It is a Zacks Rank #1 (Strong Buy) stock.
3. Prestige Brands (NYSE:PBH)
Prestige Brands makes over-the-counter healthcare and household cleaning products to retail outlets in the U.S., Canada, and certain international markets. Some of its brands include Dramamine, Fiber Choice, Clear Eyes, Chloraseptic, and Comet, among many others. Approximately 95% of its sales come from North America. It has a market cap of $1.6 billion.
Shares of PBH are down more than 10% over the last two months but earnings momentum has been solid over that period. It is a Zacks Rank #2 (Buy) stock. The stock trades around 16x 12-month forward earnings.
4. FelCor Lodging Trust (NYSE:FCH)
FelCor Lodging Trust is a real estate investment trust (REIT) that owns a portfolio of mostly upper-upscale and luxury hotels in major and resort markets. It had an ownership interest in 57 hotels in 20 states as of June 30, 2014. It has a market of $1.2 billion.
The hotel industry has been strong this year, and FelCor has been no exception. Earnings estimates have been rising for the company as it has delivered three straight positive surprises. This has sent the stock to a Zacks Rank #2 (Buy). Despite strong earnings momentum, shares are down more than 11% since mid-August. The stock trades around 12x 12-month forward earnings.
The Bottom Line
Small cap stocks have gotten beaten lately. But that could present a good buying opportunity for these 4 stocks.
Todd Bunton, CFA is a Stock Strategist for Surprise Trader services.
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