As the market continues to grapple with the effects of the coronavirus pandemic, some investors are seeing strength among U.S. small-cap stocks.
In an interview with CNBC’s “Squawk Box Europe” on Friday, Nick Ford, who manages the U.S. Opportunities Fund for London-based Premier Miton Investors, said a handful of American small and mid-cap companies are “thriving” under the Covid-19 lockdown and will likely continue to do so as investors pursue greater “earnings visibility.”
He also pointed out that small-cap stocks, which typically have a market capitalization between $300 million and $2 billion, broadly tend to either outperform or underperform the S&P 500 in seven-year cycles. Therefore, it is high time for a resurgence.
“We are just exiting a seven-year underperformance cycle, partially driven by the popularity of mega stocks, particularly the FAANGs, and investors have been forced into mega-cap stocks because if you are benchmarked against the S&P 500 and you don’t own Facebook (FB, Financial), Apple (AAPL, Financial), Netflix (NFLX, Financial), etc., you are going to trail the index, and that sucks money out of the small-cap sector,” Ford said.
Since valuations are now at historic lows and heading toward the end of the cycle, Ford said small caps in the U.S. will benefit from the economic recovery “at a greater degree” than many of their larger peers who profit from overseas earnings. As such, he believes “investors looking for a domestic recovery play should definitely look at this space.”
Based on these observations, the GuruFocus All-in-One Screener, a Premium feature, looked for value opportunities among U.S. small-cap companies that had a predictability rank of at least one out of five stars, were trading below the Peter Lynch value of 15 and outperformed the S&P 500 Index by at least 15% over the past six months. The benchmark index has posted a return of around -2.01% year to date.
As of July 10, stocks that met these criteria included MarineMax Inc. (HZO, Financial), Catalyst Pharmaceuticals Inc. (CPRX, Financial) and Green Brick Partners Inc. (GRBK, Financial).
MarineMax
With a gain of nearly 50% over the past six months, MarineMax has a $492.24 million market cap; its shares were trading around $23.06 on Friday with a price-earnings ratio of 12.08, a price-book ratio of 1.28 and a price-sales ratio of 0.39.
The GuruFocus valuation rank of 5 out of 10 indicates it is fairly valued even though the share price and price-sales ratio are near multiyear highs.
GuruFocus rated the Clearwater, Florida-based boat dealer’s financial strength 5 out of 10. While the company has issued approximately $81.3 million in new long-term debt over the past three years, it is still at a manageable level due to having adequate interest coverage. The Altman Z-Score of 2.93, however, indicates it is under some pressure since the return on invested capital is surpassed by the weighted average cost of capital, indicating MarineMax spends more money than it makes.
The company’s profitability scored a 6 out of 10 rating, driven by an expanding operating margin, strong returns that outperform a majority of competitors and a moderate Piotroski F-Score of 4, which implies business conditions are stable. MarineMax also has a one-star predictability rank. According to GuruFocus, companies with this rank typically return an average of 1.1% annually over a 12-month period.
No gurus currently own the stock.
Catalyst Pharmaceuticals
Having climbed around 15% over the past six months, Catalyst Pharmaceuticals has a market cap of $519.15 million; its shares were trading around $5.02 on Friday morning with a price-earnings ratio of 12.63, a price-book ratio of 5.24 and a price-sales ratio of 4.52.
Boosted by a comfortable level of interest coverage and a robust Altman Z-Score of 18.99, the biopharmaceutical company that develops treatments for neurological diseases, which is headquartered in Coral Gables, Florida, was given a financial strength rating of 8 out of 10 by GuruFocus. While the Sloan ratio suggests the company has poor earnings quality, the ROIC significantly outweighs the WACC, meaning it has good profitability potential.
Despite having strong margins and returns that outperform a majority of industry peers, Catalyst Pharmaceuticals’ profitability was rated 1 out of 10. The company also has a high Piotroski F-Score of 7, which indicates operations are healthy, and a one-star predictability rank.
Of the gurus invested in Catalyst Pharmaceuticals, Jim Simons (Trades, Portfolio)’ Renaissance Technologies has the largest holding with 0.71% of outstanding shares. Chuck Royce (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio) and Caxton Associates (Trades, Portfolio) also own the stock.
Green Brick Partners
Posting a gain of 12% for the past six months, Green Brick Partners has a $648.4 million market cap; its shares were trading around $12.81 on Friday with a price-earnings ratio of 10.54, a price-book ratio of 1.2 and a price-sales ratio of 0.79.
The Plano, Texas-based residential real estate development company’s financial strength and profitability were both rated 5 out of 10 by GuruFocus. Although Green Brick has issued approximately $245.97 million in new long-term debt over the past three years, it is at a manageable level. The Altman Z-Score of 3.47 also indicates it is in good standing despite the fact its assets are building up at a faster rate than revenue is growing.
While the homebuilder’s operating margin is in decline, it still outperforms over half of its industry peers. The company is also supported by strong returns, but the low Piotroski F-Score of 3 implies business conditions are in poor shape. Green Brick also has a one-star predictability rank.
With a 47.65% stake, David Einhorn (Trades, Portfolio) is the company’s largest guru shareholder by far. Other top guru investors are Diamond Hill Capital (Trades, Portfolio), John Rogers (Trades, Portfolio), Third Avenue Management (Trades, Portfolio), Hotchkis & Wiley and Caxton Associates.
Disclosure: No positions.
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