Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

These Small Caps Now Hold Deep Value

The market sell-off in September and October was especially tough on small cap stocks. They often suffer from a flight to quality as investors seek the safe haven of blue chips when the seas get rough. Since the market's trough, some oversold small caps began to rebound, but many remain closer to the 52-week low than the 52-week high.

Indeed among stocks in the S&P 600 small-cap index, you can find dozens of stocks trading well below the forward broader market multiple of 15.5.  Here's a list of 10 small-cap stocks (trading in that index) that now trade for less than 10 times earnings. The key trait these firms share: All of them are expected to post higher earnings per share, or EPS, in 2015, and yet-higher EPS in 2016.

Company 2014 EPS 2015 EPS 2016 EPS 2015 P/E
Cash America Int'l (CSH) $4.42 $4.54 $4.78 5.4
AK Steel (AKS) $ (0.21) $1.07 $1.20 6.1
EZCORP (EZPW) $1.33 $1.59 $1.67 6.9
Microsemi (MSCC) $2.78 $3.20 $3.53 8.4
Encore Capital Group (ECPG) $4.46 $5.13 $5.76 8.7
TTM Technologies (TTMI) $0.44 $0.78 $0.98 8.8
Hornbeck Offshore Services (HOS) $2.52 $3.30 $3.57 9.4
General Cable (BGC) $0.73 $1.48 $1.89 9.4
Synaptics (SYNA) $4.85 $6.53 $6.71 9.5
Outerwall (OUTR) $6.12 $6.62 $8.70 9.7
Century Aluminum (CENX) $1.09 $2.81 $3.11 9.8
Source: ThomsonReuters

I am especially intrigued by industrial firms such as AK Steel Holding Corp. (NYSE: AKS), General Cable Corp. (NYSE: BGC) and Century Aluminum Co. (Nasdaq: CENX) because they are highly leveraged to a U.S. economic recovery that appears set to take root in 2015 and 2016.

Yet looking at recent Q3 results, we're not quite there yet. Many of the firms that you see on the table above have been recently subject to downward earnings revisions. Though analysts expect them to show profit growth in 2015 and 2016, they now think such growth will be more muted than they previously thought.

Instead, it's wise to explore small caps that are expected to see steady EPS gains, sport low multiples and have been the recent subject of UPWARD earnings revisions. Investors tend to flock toward companies with rising outlooks, not falling outlooks. In that context, here is a revised group of small cap bargains.

Company 2014 EPS 2015 EPS 2015 EPS (90 Days Ago) 2016 EPS 2015 P/E
Microsemi (MSCC) $2.78 $3.20 $3.15 $3.53 8.4
Encore Capital Group (ECPG) $4.46 $5.13 $5.08 $5.76 8.7
Synaptics (SYNA) $4.85 $6.53 $5.50 $6.71 9.5
Century Aluminum (CENX) $1.09 $2.81 $1.91 $3.11 9.8
Sanmina (SANM) $2.30 $2.47 $2.30 $2.64 10.2
SYNNEX (SNX) $6.06 $6.70 $6.63 $7.23 10.6
Veritiv (VRTV) $3.33 $4.34 $4.06 $4.90 10.6
Atlas Air Worldwide (AAWW) $3.58 $3.76 $3.48 $3.86 11.1
QLogic (QLGC) $0.99 $1.06 $0.97 $1.15 11.1
Winnebago (WGO) $1.83 $2.00 $1.91 $2.04 11.5
Source: ThomsonReuters

Trying to find a stock at the right nexus of value and earnings momentum can be tricky. Take touch-screen maker Synaptics, Inc. (Nasdaq: SYNA) as an example. Analysts identified a great deal of 2015 business momentum for the company in August and September, thanks to the rising adoption of finger-print sensors in mobile devices. That led them to nudge up the 2015 EPS outlook to $7 a share from $5.50.

Third quarter results led analysts to curb their enthusiasm (and lower estimates), but the key point remains: Synaptics' forward outlook is a lot better than it was 90 days ago, even as shares have lost a third of their value since a mid-summer peak. It's the first time that this stock has traded for less than 10 times forward earnings in several years.

The company hosted its annual analyst day on November 18, where it focused on expected rapid adoption of fingerprint sensors for smart phones. It also discussed a pair of key acquisitions -- Validity and Renesas SP Drivers. These acquisitions provide "a meaningful opportunity for Synaptics to extend its growth opportunities into new key end markets through increased content," according to analysts at Pacific Crest Securities. Their $100 price target represents more than 60% upside from current levels.

Bargain hunters may also want to give a fresh look at Winnebago Industries, Inc. (NYSE: WGO). The maker of recreational vehicles has been in a downtrend for much of 2014, but a solid Q3 report (and outlook) has given shares a fresh bounce.

Winnebago is the classic baby-boomer stock. Though the early boomers (born in the 1940s and early 1950s) are already retiring --and hitting the road in RVs -- younger boomers born in the years up to 1964 still have a life of leisure ahead of them. As Morningstar's David Whitson notes, "baby boomers total 78 million, and this aging group adds 350,000 people to Winnebago's target customer base each month."

Winnebago, and other purveyors of big-ticket leisure items, are in a curious phase of the economic cycle right now. Demand has rebounded from the post-recessionary lows, yet investors sense that consumers still remain cautious about making a major purchase. That weakening sentiment explains why shares have been steadily falling this year after a prior solid rebound. Shares, trading for less than 12 times projected 2015 profits, seem to be offering a solid entry point.

To be sure, Winnebago appears poised for moderate single-digit growth in the near-term. But the demographic tailwind from retiring baby boomers, coupled with expectations of a firming U.S. economy, should help Winnebago's sales growth to accelerate as we head to 2016 and 2017.

Risks To Consider: Small caps will always be vulnerable in times of market weakness, so it's best to focus on this asset class if you think that the broader market will remain on solid footing.

Action To Take --> Stocks such as Synaptics and Winnebago have fallen far from their 52-week high, even as many large and mid-cap stocks flirt with all-time highs. Both of these companies should benefit from key macro trends (rising penetration of mobile devices and higher spending on leisure goods). When you consider their low price-to-earnings ratios, both are poised for solid rebounds in 2015 from an earnings momentum and share price momentum perspective.

These stocks strong momentum could make them a candidate for the Alpha Trader system. When a company has upward momentum greater than 70% of the broader market and strong free cash flow, it is signaled as a "buy" on the Alpha Trader system. This technique has been used to flag stocks that are about to see double, sometimes triple-digit upside in the weeks and months before it happens. For more information about the stocks currently flashing "buy," click here.

This article was originally published on These Small Caps Now Hold Deep Value