Shares of small companies have been through a roller-coaster ride in 2021, but an opportunity might be presenting itself soon – especially in small-cap value stocks.
Small caps ripped higher early on this year as investors expected a rebound in the U.S. economy and were willing to take on risk during the early phase of an economic cycle. But the COVID-19 delta variant has investors worried that the recovery will stall. The result? The small-cap Russell 2000 is up 8% year-to-date – less than half the 17% gains of the S&P 500 in that same time frame.
But zooming in, small-cap value stocks have outperformed their growth counterparts this year. The iShares Russell 2000 Value ETF (IWN) is up 20% so far in 2021. By comparison, the iShares Russell 2000 Growth ETF (IWO) is roughly flat on a year-to-date basis.
Naturally, continued delta variant worries would weigh broadly on small caps, and particularly on value plays in cyclical sectors such as energy, industrials and financials. But Scott Wren, Senior Global Market Strategist at Wells Fargo Investment Institute, doesn't seem too worried about the longer-term performance of small caps.
"From our view, this cyclical and small-cap underperformance is a temporary stumble," he says. "Continue to lean into the recovery."
Translation: don't give up on small-cap stocks just yet. If nothing else, the recent pullback allows investors to initiate positions in what has historically been one of the best-performing asset classes at more attractive prices. And if you really want to "lean into the recovery," value plays remain the more direct choice.
With that in mind, here are 10 great small-cap value stocks to buy. These picks represent diverse industries, ranging from online gaming to infrastructure, auto parts to health and wellness. And each of these small-cap value stocks has benefited from a rebounding U.S. economy in 2021 – and could have more room to run.
Disclaimer
Data is as of Aug. 18. Dividend yields are calculated by annualizing the most recent payout and dividing by the share price.
Koppers
- Market value: $646.6 million
- Industry: Specialty chemicals
- Dividend yield: N/A
Investors looking for a play on infrastructure spending should consider Koppers (KOP, $30.30), which makes treated wood products and chemical preservatives used in railroad bridges and crossings, utility poles, and residential home construction.
KOP is the largest supplier of crossties to Class I railroads in the U.S. and the second-largest supplier of utility poles. The company also holds top market shares in wood preservation chemicals, coatings and fire retardants. It has a global footprint, with 43 locations across North and South America, Europe, Asia and Australia.
Koppers continues to solidify its position as the market leader in wood treatment and protection chemicals via acquisitions and capacity expansion. Although this has swelled its debt, KOP has begun to address high leverage by divesting non-core assets and cutting expenses. The company plans to trim $30 million from debt this year and reduce its net leverage ratio to 3.1x. With no significant debt maturities before 2024, the firm has breathing room to pay down debt.
The company's adjusted earnings per share (EPS) rose 11% in the June quarter as a result of the impact of a strong home improvement market, partially offset by higher lumber prices. The company is guiding for adjusted EPS of $4.35 to $4.60 this year, up roughly 9% at the midpoint from earnings of $4.12 per share last year.
This is one of the cheaper small-cap value stocks, too, trading at a 7.1 times price multiple to forward earnings.
KOP is also well-liked by Wall Street pros. Of the five analysts covering the stock tracked by S&P Global Market Intelligence, three have it at Strong Buy, one says Buy and one deems it a Hold. Plus, the consensus price target of $43.40 represents expected upside of 43.2% over the next 12 months or so.
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M/I Homes
- Market value: $1.8 billion
- Industry: Residential construction
- Dividend yield: N/A
M/I Homes (MHO, $62.118) is one of the country's biggest producers of single-family homes, arriving in 13th place on Builder's list of top 100 homebuilders. The company serves 15 markets across 10 states and has a particularly strong footprint in some faster-growing areas, including Texas, Florida and the Carolinas. MHO's customer niche is first-time and move-up buyers seeking affordable home designs.
The company has experienced phenomenal success with its Smart Series-designed homes for first-time buyers. This concept was introduced five years ago in Tampa, Florida, and has expanded to 62 Smart Series home communities across 13 markets, with more planned during 2021. Smart Series homes accounted for 39% of MHO's June quarter sales.
Robust new home sales, spurred by continued low interest rates, have led to a surge in homebuilding. M/I Homes delivered 4,277 homes in the first six months of 2021, 39% growth in sales and 116% EPS gains. Explosive growth in contract backlog, which rose 49% to 5,488 homes in the six months ended June 30, bodes well for the company's future results.
M/I Homes controls and/or owns enough vacant land to support its building plans for the next five years. The housing stock also has great liquidity to fund growth, based on the $372 million in cash it had at the end of June, net homebuilding debt at just 16% of capitalization and no major debt maturities before 2025.
Despite a housing market boom and the company's record $2.5 billion in backlog sales, shares of this small-cap value stock are priced at only 4.2 times forward earnings.
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Perdoceo Education
- Market value: $761.1 million
- Industry: Education and training services
- Dividend yield: N/A
Perdoceo Education (PRDO, $10.86) provides onsite and online post-secondary education to non-traditional adult students through two accredited institutions – Colorado Technical University and American InterContinental University. The company offers a variety of degree options, including associate, bachelor's, master's and doctoral, with programs in business, nursing, computer science, information technology and criminal justice, among others.
This education services provider is benefiting from rising demand for post-secondary education, growing acceptance of online learning platforms, employer preference for hiring skilled professionals and increasing participation by non-traditional and adult students.
PRDO's recent investments in technology initiatives such as its Intellipath personalized learning technology are paying off by boosting student retention rates and enrollments. Total enrollments were at 43,100 students at the end of June, up 7.5% from the year prior. Adjusted EPS improved 5% in the first six months of 2021 and Perdoceo is guiding for 2021 adjusted EPS of $1.58 to $1.64 for fiscal 2021, which would represent a 3.2% improvement at the midpoint from 2020.
To accelerate its top-line growth, Perdoceo recently acquired DigitalCrafts, which specializes in training for web development, web design and cybersecurity. A liquid balance sheet showing minimal long-term debt and $480.7 million of cash and equivalents provides this company with plenty of expansion capital.
PRDO shares are modestly valued at a 6.7 times price multiple to forward EPS and a 6.3 times price multiple to cash flow.
As far as analysts go, the three covering PRDO that are tracked by S&P Global Market Intelligence rate it a Buy or Strong Buy, with an average target price of $22 – more than double its current price. In other words, the pros think this is one of the best small-cap value stocks out there.
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Primoris Services
- Market value: $1.3 billion
- Industry: Engineering and construction
- Dividend yield: 1.0%
Another potential play on infrastructure spending is Primoris Services (PRIM, $24.87). This company provides engineering and construction services across the U.S. and Canada to major public utilities, petrochemical and energy companies and municipal governments. PRIM operates across three business segments – utilities (48% of revenues), energy/renewables (38% of revenues) and pipeline (14% of revenues).
Recent investments in its utilities and energy/renewables businesses, including the acquisition of telecom services platform Future Infrastructure, paid dividends for the company during the June quarter, with both of these business segments achieving 20%+ year-over-year sales growth. Although revenues from the pipeline segment declined due to the closeout of projects in 2020, gross margins improved. The company is guiding for 2021 EPS ranging from $2.30 to $2.50, which is up 11% at the midpoint from last year.
Looking ahead, Primoris should benefit from its transition to higher growth and margin markets like renewables, where the company is experiencing secular tailwinds and rising backlog. Primoris estimates a $225 billion market opportunity in renewables, which currently represents $350 million of the company's $2.9 billion backlog.
Primoris has been a reliable grower, delivering 13% annual revenue growth and 15.5% yearly adjusted EPS growth over three years. The company also pays a 6-cent per share quarterly dividend, currently yielding 1.0%.
PRIM stock trades at a modest 10.5 times price multiple to forward earnings.
As far as small-cap value stocks go, analysts are bullish toward this one. UBS analyst Steve Fisher initiated coverage on PRIM with a Buy rating in July. He likes the company's new business mix deemphasizing oil and gas. Morgan Stanley analyst Matthew Sharpe also recently commenced coverage, rating shares Overweight (the equivalent of a Buy), highlighting PRIM's durable portfolio and tailwinds driving future revenue growth .
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Standard Motor Products
- Market value: $939.3 million
- Industry: Auto parts
- Dividend yield: 2.4%
Standard Motor Products (SMP, $43.85) is a leading manufacturer, distributor and marketer of replacement parts for cars and heavy-duty trucks. Its products are sold across North and South America, Europe and Asia under well-known brands that include Standard, BWD, TechSmart, Intermotor, Hayden, ACI and Four Seasons.
The company operates in two business segments – engine management, which specializes in ignition and emission parts, and temperature control, which focuses on parts for air conditioning and heating systems, engine cooling, power windows and washer systems.
New business wins and two recent acquisitions fueled 38% year-over-year sales growth and 142% adjusted EPS gains for Standard Motor Products during the June quarter. The bottom line came in at $1.26 per share, well above the 60 cents per share analysts were expecting. While some of this strong growth reflects easy comparisons to last year's COVID-impacted June quarter, these results also compare well to 2019 pre-COVID financial performance.
SMP expanded its footprint in the OEM (original equipment manufacturer) market for heavy duty and commercial vehicle parts by acquiring two businesses – power management devices maker Trombetta and Stoneridge's (SRI) soot sensor division. The purchases together add $75 million to annualized sales and critical mass to become a major supplier in this OEM space. In addition, these transactions help prepare Standard Motor Products for the market's gradual shift to electric vehicles (EVs).
As far as analyst ratings go, two of the pros covering SMP that are tracked by S&P Global Market Intelligence rate the stock a Strong Buy, while the other one calls it a Buy. Plus, shares are trading at a deep discount to their $54.67 consensus price target.
When it comes to small-cap value stocks, this one is worth keeping on your radar.
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Supernus Pharmaceuticals
- Market value: $1.3 billion
- Industry: Drug manufacturer
- Dividend yield: N/A
Supernus Pharmaceuticals (SUPN, $24.02), formerly known as Shire Laboratories, develops and commercializes products for the treatment of central nervous system (CNS) disorders. The healthcare company's portfolio includes approved treatments for epilepsy, migraine and attention-deficit hyperactivity disorder (ADHD). Supernus is also developing product candidates for Parkinson's disease, epilepsy, depression and rare CNS diseases.
Supernus secured Food and Drug Administration (FDA) approval for Qelbree, its novel nonstimulant treatment for ADHD, in April. ADHD is one of the most common neurodevelopmental disorders diagnosed in childhood and it often lasts into adulthood.
The Centers for Disease Control and Prevention (CDC) estimates that approximately 6.1 million children (9.4%) in the U.S. have been diagnosed with ADHD, and the prevalence of ADHD in adults domestically could range between 4% and 5%. Unlike other drugs in this space, Qelbree is neither a stimulant nor a controlled substance.
SUPN has an FDA application pending for SPN-830, a subcutaneous injection pump to treat patients with Parkinson's disease, a neurodegenerative disorder that affects roughly 1 million Americans. The mainstay treatment for Parkinson's is levodopa, but the effect of this drug is short-lived. SPN-830 provides continuous treatment for the ill-effects of the disease.
June quarter revenues for Supernus rose 12% from the year prior, mainly due to a full quarter of sales for Apokyn, a treatment acquired last year for advanced Parkinson's disease and a small contribution from Qelbree. EPS was 34% lower at 43 cents as a result of expenses related to Qelbree's May launch and the commercialization of Apokyn and other acquired products.
Supernus is guiding for 2021 sales to arrive at $550 million to $580 million – up 8.7% at the midpoint from 2020 revenues – and operating earnings between $70 million and $90 million, down from 2020 due to product launch costs.
Analysts are upbeat toward this small-cap value stock. According to S&P Global Market Intelligence, two pros deem SUPN worthy of a Strong Buy rating, one says Buy and one calls it a Hold. The average price target of $35.00 represents expected upside of 45.7% over the next 12 months or so. And Jeffries analyst David Steinberg (Buy) believes SUPN could gain 20% market share in ADHD with Qelbree, and forecasts peak sales for the product above $600 million.
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Tutor Perini
- Market value: $695.1 million
- Industry: Engineering and construction
- Dividend yield: N/A
Another solid infrastructure play is Tutor Perini (TPC, $13.61), which provides general contracting, design and construction services to public and private clients worldwide. Engineering News-Record ranks this company as the nation's largest contractor in the transportation market and one of the top domestic contractors overall.
TPC's largest business segment – civil – accounts for 42% of revenues. The civil segment specializes in bridges and tunnels, highways, mass transit and wastewater treatment, and could benefit significantly from the Biden administration's proposed infrastructure spending bill. Tutor Perini's two remaining businesses, building and special contracting, represent 35% and 23% of revenues, respectively.
Most of the company's civil engineering projects are large scale and complex, ranging in value from $100 million to $1.0 billion. In bidding for new contracts, Tutor Perini counts its proven technical experience, abilities to bond in support of very large projects and sizable equipment fleet as major competitive advantages.
The company ended the June quarter with $7.5 billion of backlog, including $5.8 billion of projects for state and local governments. This huge backlog should provide high revenue visibility over the next several years.
While June quarter revenues were down slightly from last year at $1.2 billion, EPS improved 65% due to a continued shift towards higher margin projects in the civil segment.
The shares are attractively priced as far as small-cap value stocks go, trading at just 6.5 times forward earnings.
Looking at analyst ratings on S&P Global Market Intelligence, two pros rate TPC stock a Strong Buy, while one calls it a Hold.
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Tupperware Brands
- Market value: $1.1 billion
- Industry: Packaging and containers
- Dividend yield: N/A
Food containers made by Tupperware Brands (TUP, $22.10) are a staple in most U.S. homes, and the company also distributes its products in over 80 countries through its extensive network of independent sales reps. However, Tupperware has struggled in recent years due to declining revenues, an eroding network of sales associates and a debt-laden balance sheet.
Under new management, the consumer discretionary name began implementing a turnaround plan last year designed to trim costs, build new digital distribution channels, launch new products in the beauty and personal care space and better motivate its sales agents.
These strategies began delivering results almost immediately, helping Tupperware increase gross savings by $193 million last year and fueling 2021 sales growth. During this year's June quarter, Tupperware recorded its fourth consecutive quarter of double-digit sales growth. June quarter sales rose 17% from the year prior and adjusted EPS grew 13% to 95 cents.
TUP has used its rising free cash flow and proceeds from the sale of non-core assets to reduce debt and ended the June quarter with its ratio of debt-to-adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) at 2.05, down from 4.91 in Q2 2020. Tupperware's board of directors also just approved a $250 million share repurchase plan.
Citigroup analyst Wendy Nicholson recently upgraded TUP to Buy from Hold, citing the company's attractive valuation and her growing optimism that the turnaround plan is gaining traction.
Among small-cap value stocks, Wall Street pros are projecting major growth for this one. While Tupperware doesn't provide guidance, consensus analyst estimates look for EPS to be up 33% this year and 12% next year.
TUP shares have an attractive valuation, too, trading at 6.9 times forward earnings.
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Turtle Beach
- Market value: $465.6 million
- Industry: Consumer electronics
- Dividend yield: N/A
Turtle Beach (HEAR, $25.70) is a top player in the $8.5 billion gaming accessory market. The company sells console gaming headsets, keyboards, mice and other gaming accessories. The global gaming market is experiencing explosive growth, expected to swell from $176 billion this year to more than $200 billion by 2024.
Turtle Beach boasts the number one gaming headset for Nintendo (NTDOY), Microsoft's (MSFT) Xbox and Sony's (SONY) Playstation systems and holds revenue share bigger than the next four largest competitors combined. The company's Roccat product line is expanding on a global basis, and sales tripled in the first half of this year. Another growth catalyst comes from the company's January acquisition of Neat Microphones, which is launching a new product line in 2021.
For this year, Turtle Beach is targeting revenue growth of 7%. The company recently increased guidance for 2021 adjusted EPS by 3.3% to $1.55.
Given its robust growth, this is one small-cap value stock that's in high demand. Activist investor Donerail Group, which owns a 3.1% stake in HEAR, reportedly offered to buy out the company earlier this year, said people familiar with the matter. Subsequent reports indicated Turtle Beach declined the offer.
All five of the analysts covering HEAR that are tracked by S&P Global Market Intelligence rate the stock a Buy or Strong Buy. Plus, the average target price of $39.83 suggests implied upside of 55% over the next 12 months or so.
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USANA Health Sciences
- Market value: $1.9 billion
- Industry: Household and personal products
- Dividend yield: N/A
USANA Health Sciences (USNA, $94.42) develops, manufactures and markets nutritional and personal care products that promote long-term health. Sales are made direct through a worldwide network of independent agents. The company markets more than 60 products, has sales in 24 countries and serves approximately 652,000 active customers.
Over 49% of the company's sales are made in China. The rest of Asia contributes 34% of revenues, and Europe and the Americas together represent the remaining 17%. USNA plans to grow by investing in digital marketing, launching additional products and expanding internationally and via acquisitions.
The early 2021 launch of the company's new Active Nutrition product line, which includes new products for weight management, digestive help, energy and hydration, helped USNA achieve 30% year-over-year sales gains, 9% active customer growth and 42% EPS improvement during the June quarter.
The company warned of tougher COVID-19-related comparisons in the second half of 2021. However, it's still guiding for 2021 sales growth of 11.5% at the midpoint of its $1.24 billion to $1.28 billion guidance, while EPS is expected to arrive between $6.15 and $6.50 – up 8% at the midpoint.
When it comes to valuation, this is another one of the small-cap value stocks that is reasonably priced. USNA shares are trading at a modest 14.3 times forward earnings.
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