The small-stock slaughter continues.
In the 12 months through April 14, small stocks fell almost 10%, while large stocks rose 8%. Moreover, the market’s big boys have beaten the small fry in four of the past five years.
With inflation roaring, the Federal Reserve raising interest rates and Russia waging war, investors may continue to prefer the relative safety of big stocks for a while. But bargains are starting to emerge among the small fry.
Here are five small stocks that I believe are worthy of consideration.
MarineMax
MarineMax Inc. (HZO, Financial), based in Clearwater, Florida, is the largest U.S. retailer of recreational and pleasure boats. This stock was a Covid-19 play, since boating is a safe form of recreation compared to, say, attending a football game with 50,000 other fans.
The shares doubled in 2020, then gained an additional 68% in 2021. So far this year, it’s given up about 32%.
After that decline, the stock sells for less than six times recent earnings. Its normal multiple is about 14.
If you expect a recession, don’t buy this stock. But if your outlook resembles mine – high growth and high inflation for the next 12 months, despite the Fed’s efforts to restrain the economy – I think it’s a good purchase.
Escalade
A maker of recreational equipment such as basketball hoops, archery equipment and trampolines, Escalade Inc. (ESCA, Financial) has posted annual earnings growth averaging nearly 15% over the past five years. The company calls Evansville, Indiana home.
I was worried when it sold off its 50% interest in Stiga (ping-pong balls) in 2018. But earnings have continued to grow nicely without Stiga. The stock is inexpensive, selling for 0.59 times revenue and less than 8 times recent earnings.
Heritage Crystal-Clean
Heritage Crystal-Clean Inc. (HCCI, Financial) of Elgin, Illinois recycles oil, wastewater, antifreeze, solvents and batteries for small and medium-sized businesses. The company’s earnings and free cash flow have been growing nicely for the past five years.
I figure that state and federal environmental regulations will continue to be tightened, to this company’s advantage. And I like it that debt is only 25% of stockholders’ equity, quite a good ratio these days.
Turtle Beach
Based in White Plains, New York, Turtle Beach Corp. (HEAR, Financial) makes headsets for gamers and audiophiles. Big question: Will the gaming market shrink as the pandemic abates, or will it grow as virtual-reality games gain in popularity?
I think both things will happen simultaneously, and the net result will be annual revenue growth at least in keeping with Turtle Beach’s pace of the past five years, in the area of 10%.
At 20 times earnings, this stock is expensive than I usually go for. But I like its niche, and I like the fact that the company is debt-free.
1-800-Flowers.com
Less than a year ago, shares in 1-800-Flowers.com Inc. (FLWS, Financial) traded at $37. Today they trade at less than $14.
The company’s costs have increased and sales have slowed. On a recent call, management projected a continuation of the adverse trends over the next year or so.
As a result, the shares now sell for 10 times recent earnings. That’s cheap compared to the stock’s normal ratio, which has been about 21 over the past decade.
As the pandemic wanes, there will be more travel and perhaps less need to ship flowers or chocolates long-distance. But there will still be lots of long-distance relationships, and the convenience of online ordering shouldn’t be underestimated.
Past record
This is the 25th column I’ve written about small stocks since the beginning of 2000. My picks have averaged a 12-month return of 16.9%.
That beats the Standard & Poor’s 500 Total Return Index, which has averaged 8.3%. It’s also better than the average for the Russell 2000 Total Return Index, a small stock index, which has averaged 11%.
My picks have beaten both indices 15 times out of 24.
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.
The past 12 months, however, were bad for small stocks and even worse for my selections. My picks from April 19, 2021 declined 15.3% through April 14, 2022.
The worst performer was Superior Group of Companies (SGC, Financial), down 31%. Haverty Furniture Co. (HVT, Financial) and Preformed Line Products Co. (PLPC, Financial) also did badly. Bank First Corp. (BFC, Financial) posted a modest gain.
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].
