According to recent data from Bank of America’s (BAC, Financial) BofA Securities, the small-cap stocks on the Russell 2000 index are now trading at their lowest average forward price-earnings ratio since 2009. The Russell 2000 is also down 19% year to date versus the S&P 500’s 16% loss.
It is certainly not unusual for small-cap stocks to be undervalued relative to their large-cap peers; in fact, that is what has gained small caps a reputation for having the potential to provide better returns (if you can pick the right ones). However, the last few years have caused some investors to question the wisdom of small-cap investing because, as data from BofA showed, small caps have begun demonstrating lower levels of volatility than large caps during periods of market stress such as the Covid-19 selloff and the Brexit referendum.
While I think lower volatility in the face of negative news could contribute to fewer dramatic dips in small-cap share prices, that does not negate the fact that small caps have much more room to grow than large caps. These stocks also get less attention from the media, so it is much more likely that individual investors can find value opportunities before a major catalyst makes the investing world pay attention to them.
With this in mind, I used the GuruFocus All-in-One Screener, a Premium feature, to screen the market for small-cap stocks that are undervalued based on GF Value and have been bought by multiple gurus recently. Among the results, here are three that caught my eye for stellar growth and positive outlooks.
Zynex
Zynex Inc. (ZYXI, Financial), a medical device company that makes electrotherapy devices for pain management, physical rehabilitation, diagnosis and cardiac monitoring, is priced at $13.54 per share as of this writing with a market cap of $520.91 million.
The GF Value chart warns it is a potential value trap due to the share price being too far below GF Value, but this is likely due to previous overvaluation skewing the chart, as the company’s fundamentals remain solid with a financial strength rating of 8 out of 10 and a profitability rating of 8 out of 10.
While the price-earnings ratio is a little high at 28.62, the PEG ratio is just 0.46, indicating the stock is undervalued when taking its growth into consideration. The company has a three-year revenue per share growth rate of 57.4% and a three-year Ebitda per share growth rate of 29.6%.
Gurus have been net buyers of Zynex stock in recent quarters, as shown in the chart below. Chuck Royce (Trades, Portfolio), Jim Simons (Trades, Portfolio)' Renaissance Technologies, Hotchkis & Wiley and Baillie Gifford (Trades, Portfolio) all own shares as of the end of the third quarter.
Zynex’s core business is electrotherapy. According to a study by The CHP Group, only 23% of chronic pain patients on opioids found the treatment to be “very effective.” Over time, opioids become less effective in terms of helping manage pain, which is resulting in an increase in interest in nonpharmacological solutions for pain management such as electrotherapy, which can delay the need for opioids. In addition, Zynex has expanded into hemodynamic monitoring via acquisitions, an area of medical device technology that the company believes to have a much greater total addressable market than electrotherapy.
MarineMax
MarineMax Inc. (HZO, Financial), the world’s largest retailer of new and used recreational boats and yachts, changed hands at around $31.38 per share on Monday for a market cap of $691.31 million.
According to the GF Value chart, the stock is significantly undervalued; shares have fallen to half of all-time highs. The company still has strong fundamentals, as shown by its financial strength rating of 8 out of 10 and its profitability rating of 9 out of 10.
MarineMax’s price-earnings ratio is low at 3.59, though that is often a double-edged sword for cyclical stocks like MarineMax as it results from strong earnings growth that may fall off when economic conditions deteriorate and lead the company into a cyclical downturn. The PEG ratio is incredibly low at 0.08 following revenue per share growth of 24% and Ebitda per share growth of 59.2% per year over the past three years.
Gurus have been mostly bullish on the stock for the past couple of years now. Hotchkis & Wiley, Simons' firm, Paul Tudor Jones (Trades, Portfolio), John Hussman (Trades, Portfolio), Royce and Joel Greenblatt (Trades, Portfolio) all owned shares as of the third quarter’s end.
It is undeniable that MarineMax got a huge boost from easy-money policies implemented in response to the Covid-19 pandemic, which fueled a powerful bull market. As the supply of money increased and inflation had yet to kick in, many wealthier consumers splurged on large non-essential purchases such as boats. However, that is not all there is to the story. ReportLinker estimates the global recreational boat market will continue growing at a CAGR of 7.48% through 2027, driven by higher disposable income, more tourism and greater preference for smaller boats over cruises. The company also pursues an aggressive acquisition strategy that is made possible due to the highly fragmented status of its industry.
Kulicke & Soffa Industries
Kulicke & Soffa Industries Inc. (KLIC, Financial) is a leading manufacturer of LEDs, semiconductor packaging and electronic assembly solutions. On Dec. 5, shares traded around $47.70 for a market cap of $2.72 billion.
The GF Value chart rates Kulicke & Soffa shares as significantly undervalued after their fall from all-time highs reached in September of 2021. The company has an incredible financial strength rating of 10 out of 10, and its profitability is also high with a GuruFocus profitability rating of 9 out of 10.
The price-earnings ratio of 6.76 and PEG ratio of 0.19 both indicate the stock is steeply undervalued compared to its growth. Over the past three years, the company’s revenue per share has grown at a rate of 44.2% and its Ebitda has grown at a rate of 111.2%. However, the quarterly results have shown declines from record earnings over the past year as the semiconductor industry pivots from a supply shortage to a glut.
Gurus have been net buyers of the stock over the past few quarters, though by a slimmer margin than the other two companies on this list. As of the end of the third quarter, nine gurus owned shares of Kulicke & Soffa, with the top holdings belonging to Royce, Ken Fisher (Trades, Portfolio) and Simons' firm.
Kulicke & Soffa is a global leader in semiconductor packaging and electronic assembly, providing solutions for the advanced display, automotive, communications, industrial, consumer and data processing semiconductor industries. The company has been a key beneficiary of semiconductor industry expansion as a “pick and shovel” play, and its declining results in recent quarters are a clear sign of an industry slowdown. However, thanks to Kulicke & Soffa’s fortress-like balance sheet, the company could actually benefit from a market downturn by making prudent acquisitions. According to the GuruFocus discounted cash flow calculator, the company would need to see its earnings per share decline more than 4% per year for the next decade in order for its current share price to be an accurate reflection of value.
