Editor’s note: This story was previously published in December 2018. It has since been updated and republished.
As bad as you think it’s been lately owners the market’s most familiar names, like Apple (NASDAQ:AAPL) and Amazon.com (NASDAQ:AMZN), it’s been even worse for fans of small-cap stocks. The Russell 2000 Index, which reflects the average performance of small cap equities, is now down a little more than 20% from its late-August peak. That technically puts the index into bear market territory… the first of the major indices to earn that dubious honor.
And yet, perhaps even more so than with large caps, a handful of investors are seeing some amazing bargains within the small-cap realm. Indeed, if stocks truly are about to slide into a tariff-war-inspired, recession-driven bear market, it’s the small-cap stocks that may be best positioned to weather the storm.
Here’s a rundown of the market’s best small-cap stocks that have been beaten down to bargain-basement prices they don’t quite deserve. While the most torrid of market selloffs still might be able to drag them lower, a modest market malaise may find many of these stocks quietly slipping back into rally mode.
Brooks Automation (BRKS)
It’s not easy to explain what Brooks Automation (NASDAQ:BRKS) does. It’s easier to list what it sells. Among the company’s wares are robotic-like manufacturing equipment, semiconductor handling equipment, cold storage systems and a variety of consumables a life-sciences lab might use.
Basically, Brooks helps companies in the semiconductor and life-science industries automate repetitive processes.
Admittedly, it’s as boring as it is unclear to anyone who doesn’t work in either industry. In volatile times, though, boring isn’t a bad thing. BRKS’ products are generally in demand regardless of the economic environment, and the 35% pullback from August’s high has left shares trading at a trailing P/E of only 20.6.
By the way, Brooks Automation hasn’t failed to top a quarterly earnings estimate in four years.
Pitney Bowes (PBI)
Pitney Bowes (NYSE:PBI), on the other hand, should be a relatively familiar name. This is the company perhaps best known for making postage-meters, though it’s so much more than that now. It’s become a complete soup-to-nuts solutions provider that’s relevant in the digital, ecommerce world.
That reality hasn’t changed the market’s perception of the company. The stock’s down 80% from its 2014 (yes, 2014) high, and worse than that, shares are priced at where they were in the mid-80’s (yes, the 1980’s), reflecting an ongoing deterioration of the company’s top and bottom lines.
Curiously though, the cheaper it gets and the more the ecommerce market matures, the more hedge funds seem to want it. PBI is one of the 30 most popular stocks among hedge funds, in fact, suggesting an opportunity not everybody else sees is at hand.
Like most other Chinese technology and consumer stocks, Qudian (NYSE:QD) has been struggling for the past few months and trade war fears and trade war realities have set in. Unlike most of its bigger brothers though, QD stock has been working its way higher since late last year.
Much of that strength was prompted by evidence that, despite the headwind, Qudian’s business is holding up. During its third quarter, revenue grew 32.9% year-over-year, and net income improved 5.1% (Q4 results are due March 18).Even more impressive is that it managed to do so despite the loss of a key partner before the quarter began.
Most impressive of all is that it did it when it wasn’t supposed to be able to produce those kinds of results. Qudian is a lender to Chinese consumers, but China’s economy is supposed to be running into a headwind. Maybe that’s not the case though.
Altra Industrial Motion (AIMC)
Altra Industrial Motion (NASDAQ:AIMC) makes drivetrains, but not for automobiles. Rather, it makes drivetrains, transmissions and a variety of motion control products — along with all the accompanying consumables like brakes and bearings — used in high-output physical production environments. Its customers include material handling companies, food processors, packagers and more.
The company has quietly turned up the heat while nobody was watching. Altra’s top line is on pace to improve nearly 33% this year, leading to per-share earnings growth of 40%. Yet, the pros believe the company has an encore in store. Analysts are calling for 2019 sales growth of 67%, leading to 16% earnings growth.
Granted, much of this growth is or will be the result of acquisitions, but it’s profitable growth all the same.
Petmed Express (PETS)
The buzz that surrounded the pet-care industry just a few years back has since died down. Take a closer look at the market though. While the chatter has abated, the market itself hasn’t. Grand View Research expects the global pet-care market, which was worth $131.7 billion in 2016, to grow to $202.6 billion by 2025.
The market is maturing though, as investors, consumers and companies all find a balance they can live with.
Enter Petmed Express (NASDAQ:PETS). It’s not a new company; it was founded in 1996 and went public in 1999. But, that’s not a bad thing. While the online pet pharmacy market was maturing, Petmed Express was learning and capturing market share.
The stock’s been a poor performer since early this year, but sales and earnings have both continued to grow. The stock’s trading at a modest forward-looking P/E of 10.91.
WESCO International (WCC)
It’s unlikely the average consumer knows much about WESCO International (NYSE:WCC), if they’ve ever heard of it at all. On the other hand, it’s very likely that one way or another, most consumers all over the world benefit from its products.
WESCO supplies a huge assortment of tools and consumables to companies that erect and maintain power lines, install breaker boxes, lay fiber-optic cables, repair light fixtures and more.
It doesn’t sound like a complicated business, but it is. With a massive number of product skus to sift through, large-scale customers need a company like WESCO to make resupplying a snap. WESCO adds value to the buying process by preventing maintenance logistics from becoming a headache.
Slow but steady earnings growth for this year and next says its business model is working, and you can step into WCC stock for less than 10 times next year’s projected earnings of $5.61 per share.
Source: 401(k) 2012 via Flickr
Voya Financial (VOYA)
You know Voya Financial (NYSE:VOYA) even if you don’t think you know the company, for a couple of reasons. The first is the recent television commercials involving an orange paper squirrel and rabbit, who offer tips on how to manage money. The second reason you may know Voya better than you realize is, this company used to be ING.
Regardless, the market hasn’t been kind to VOYA since early 2018. Shares were down 26% at the end of the year but have returned pretty much to where they were last time this year. At a forward-looking P/E of 9.86 in front of legitimate earnings growth expected in 2019 though, a rebound may be in the works.
Innoviva (NASDAQ:INVA) is the only pharma name to earn a spot on this list of undervalued small-cap stocks to buy, and for good reason. That is, while other biotech names may present more growth potential, Innoviva brings much less risk to the table.
Innoviva is effectively a one-trick pony, but the pony in question is reliably marketable. It owns royalty rights to the Breo/Ellipta combination used as a treatment for COPD, which was largely developed by GlaxoSmithKline (NYSE:GSK). It also owns rights to a similar combination of Anor and Ellipta. It’s not selling nearly as well yet, but it’s on a growth track.
Innoviva only enjoy royalties ranging between 5% and 10% of both COPD treatments. But, sales of both are growing, and with no R&D costs incurred, that’s high-margin, low-risk revenue.
Source: Hillary via Flickr
SYNNEX Corporation (SNX)
It’s entirely possible you’ve been served or assisted by SYNNEX Corporation (NYSE:SNX) without even realizing it.
SYNNEX helps its customers “grow and enhance their customer-engagement strategies.” Sometimes this means it supplies technologies like computers or components, and other times it means it does outsourced customer service work for its clients through its Concentrix division.
It’s still a somewhat ambiguous explanation, but not ambiguous is the company’s reliable growth streak. Quarterly revenue has grown on a year-over-year basis for the past ten quarters, and earnings growth has been almost as impressively consistent.
Most noteworthy is that this company’s top and bottom lines weren’t the least bit fazed by the 2008 recession. As it continues clawing its way back it looks as if last year’s 40% pullback may be largely unmerited.
Benchmark Electronics (BHE)
Many of the electronic devices you see and use every day weren’t actually designed or manufactured by the name branded on the device.
Those outfits lean on the likes of Benchmark Electronics (NYSE:BHE) to design and supply the components found inside high-tech wares like flight recorders, 3D printers and medical imaging devices, just to name a few.
Sure, it would be much more exciting to be a front-line name, but it would also be a much more volatile experience for BHE shareholders.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.