Small stocks are generally riskier than large ones, have fewer Wall Street analysts tracking them and are more likely to have extremely good (or bad) results. I love them.
Every April for many years, I’ve recommended a handful of small stocks in this column. Here are five of the small fry that appeal to me now.
Independent Bank
In March, two U.S. banks failed, causing investors to jettison a lot of bank investments, especially in regional banks, as opposed to those “too big to fail.”
I see many bargains in this segment now. One is Independent Bank Corp. (IBCP, Financial) of Ionia, Michigan. It has shown a profit for 11 straight years.
When I look for bank stocks, the first number I focus on is return on assets. I like to see it above 1%. Independent has exceeded this benchmark five years in a row. Like many of its peers, the stock is modestly valued – in this case, six times earnings and just barely above book value (corporate net worth).
Insteel Industries
Rebar, or steel reinforcing bar used to make concrete structures stronger, is the main product at Insteel Industries Inc. (IIIN, Financial). The company has been doing pretty well, and I think growth will probably accelerate as the U.S. tries to upgrade its aging bridges and tunnels.
The company’s revenue growth has been accelerating. It was about 5% a year over the past decade, more than 13% in the past five years and about 25% last year. Earnings have also accelerated.
Insteel seems financially strong to me, with more than $29 in cash for every dollar it has in debt.
GAMCO Investors
Mario Gabelli (Trades, Portfolio) is a wily Wall Street veteran whose knowledge of the markets is extensive. His investment firm, GAMCO Investors Inc. (GAMI, Financial), based in Greenwich, Connecticut, runs mutual funds, closed-end funds and exchange-traded funds.
Some of the funds seem to me like good investments and some don’t. But let’s look at the parent company. GAMCO has had a return on stockholders’ equity above 20% in seven of the past 10 years. I consider 15% good and 20% outstanding. GAMCO has gotten above 50% five times. The stock sells for only 8 times earnings.
Warrior Met Coal
Warrior Met Coal Inc. (HCC, Financial), based in Brookwood, Alabama, mines metallurgical coal (used in making steel) in Alabama. It sells almost all of its coal abroad, mostly to South America. It can get coal to South America and to Europe more quickly than Australian producers (its main competitors) can.
Coal is a high-polluting fuel and “clean coal,” in my view, is a myth. But I believe the industry, particularly metallurgical coal, will stay viable for longer than most people think.
Warrior has been profitable in five of the past six years, and has been highly profitable lately. The stock sells for a pathetically low multiple, only 3 times recent earnings.
Intrepid Potash
Intrepid Potash Inc. (IPI, Financial), with headquarters in Denver, Colorado, makes potash fertilizer. It also sells potash to other fertilizer makers, to oil-and gas drillers (as a component of drilling fluid) and to animal feed makers.
The company’s earnings jump around a lot, and so does the stock. It was over $100 a share a year ago and now sells for less than $28.
One tool that may be useful in valuing such a stock is the “milkshake price-earnings ratio,” a stock’s price divided by its third-best earnings figure in the past 10 years. For Intrepid, the milkshake price-earnings ratio is a little over 9, which I consider attractive. The company is also debt-free, a quality I relish.
Past record
In the past 23 years, I have written 25 columns about small stocks. The average 12-month gain on my recommendations has been 15.8%.
That compares well with the 7.8% average gain for the Standard & Poor’s 500 Total Return Index over the same periods. It also beats the 10.2% average return for the Russell 2000 Index with dividends reinvested – a small-stock index.
Eighteen of my 25 columns have shown a profit, and 15 have beaten the two indices.
Bear in mind that my column results are hypothetical and shouldn’t be confused with results I obtain for clients. Also, past performance doesn’t predict the future.
My picks last year weren’t up to snuff. On average, they fell 9.7%, while the S&P 500 dropped 4.1% and the Russell 2000 declined 9.1%.
My worst performer from a year ago was Turtle Beach Corp. (HEAR, Financial), down 37%. MarineMax Inc. (HZO, Financial) and 1-800-Flowers.com Inc. (FLWS, Financial) also had big losses. Escalade Inc. (ESCA, Financial) and Heritage Crystal-Clean Inc. (HCCI, Financial) had gains.
John Dorfman is chairman of Dorfman Value Investments LLC in Boston, Massachusetts, and a syndicated columnist. His firm or clients may own or trade securities discussed in this column. He can be reached at [email protected].
