While small-cap stocks can certainly be more volatile and risky than investing in larger or blue chip companies, there are several advantages to investing in small-caps. These companies have more room for growth than industry stalwarts, and many mutual funds don’t invest in them due to heavy SEC regulations.
But perhaps the most important advantage is the lack of analyst coverage, which means small caps are more likely to be improperly priced.
Small-cap stocks are generally defined as having a capitalization between $300 million and $2 billion. The Russell 2000 Index, which measures the performance of the small-cap segment, has outperformed the S&P 500 year-to-date, returning 3.98% compared to 2.48%.
The All-In-One-Screener can be used to find the most widely held small-caps among the gurus. The following five stocks are the most popular small-caps as of the first quarter.
Circor International (CIR, Financial)
Eight gurus currently hold shares in Circor as of the first quarter; Mario Gabelli (Trades, Portfolio) is the largest shareholder with 10.13% of shares outstanding. Circor manufactures valves and subsystems that control the flow of fluids safely and efficiently in the energy, aerospace and industrial markets.
The stock declined 29% over the past year and closed at $54.88 on June 18. The current P/E ratio is 21.55 and the P/S ratio is 1.22.
Over the past five years, the revenue growth rate was 5.3%, while EBITDA grew by 31.6%. In 2014, EBITDA per share was $4.75, down from $5.01 the year before.
The current dividend yield is 0.27%, which is close to the two-year high. The payout ratio is 6%, with plenty of room to grow the dividend in the future.
Seven gurus currently hold stakes in Aegion, with Chuck Royce (Trades, Portfolio) holding the largest position at 3.06% of shares outstanding.
Aegion provides infrastructure services to protect against the corrosion of industrial pipelines. The stock price dropped 24% over the past year, closing at $17.68 on June 18.
Revenue grew by 11% over the past five years, while EBITDA declined 16.5% over the same time period. In 2014, Aegion reported a net loss for the first time in the past 10 years, with a net loss of $37 million.
The forward P/E ratio is 11.26, while the P/S ratio is 0.5.
LB Foster Co (FSTR, Financial)
Six gurus hold stakes in LB Foster as of Q1. Chuck Royce (Trades, Portfolio) is the largest shareholder with 15.02% of shares outstanding.
LB Foster distributes products and services for rail, construction, energy and utility markets. The stock price declined 34% over the past year, and closed at $35.00 on June 18. The current P/E ratio is 13.64, while the P/S ratio is 0.57.
The revenue growth over the past five years was 8.4%, while EBITDA grew by 7.6%. Net income also rose 7.21%, recording at $25.7 million in 2014.
The current dividend yield is 0.43%, which is close to the five-year high, while the payout ratio is 6%.
Denny’s Corp (DENN, Financial)
Six gurus are invested in restaurant chain Denny’s, with John Keeley (Trades, Portfolio) as the largest shareholder with 5.88% of shares outstanding. The stock has risen 78% over the last year, closing at $11.77 on June 18. The current P/E ratio is 29.33 and the P/S ratio is 2.12.
Denny’s has struggled to grow its revenue and earnings over the past five years, with revenue declining 2.9% and EBITDA declining 3.5%.
However, free cash flow has grown almost 37% over the past five years, recording at $52.8 million in 2014.
Looking at Denny’s balance sheet, the current ratio is less than 1, which indicates the company cannot cover its short-term debt. Long term debt amounted to $151.1 million in 2014.
Alliance One International (AOI, Financial)
As of Q1, six gurus hold positions in Alliance One; Donald Smith (Trades, Portfolio) is the largest shareholder with 9.21% of shares outstanding.
Alliance One supplies tobacco to the manufacturers and marketers of tobacco products. The stock declined 21% over the last year, and closed at $2.25 on June 17. The forward P/E ratio is 35.34 and the P/S ratio is 0.1.
Over the last five years, Alliance One’s revenue growth was 2.2%, while EBITDA declined 6.8%. In 2014, EBITDA per share was $1.67, up from $1.15 the year before.
Alliance posted a net loss of $15 million last year, an improvement from the loss of $87 million in 2013.
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