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3 Best Small-Cap Value Stocks for Your 2024 Energy Portfolio

In 2023, Wall Street has experienced a notable surge, driven by a continuous drop in inflation and a simultaneous reduction in both the magnitude and frequency of interest rate hikes by the Federal Reserve. Demonstrating this pattern, the S&P 500 has risen by 22.4% year to date, approaching its all-time highs.

Despite the overall positive market sentiment, the Oil/Energy space has witnessed a total return of (2.9%) so far this year against the S&P 500’s gain of nearly 24%. There is, however, a silver lining. For starters, a number of oil stocks look ready to emerge from the bearishness. Therefore, savvy investors might have some great opportunities to build/add to their energy portfolio.

We have identified three small companies with a good value score to put your money on. These are NGL Energy Partners LP NGL, CrossAmerica Partners LP CAPL and Nine Energy Service NINE.

Energy: One of the Few S&P 500 Laggards

While the S&P 500 equity index has been on a tear, it has been a wild ride for the energy market in 2023, setting pulses racing of even the steadiest investors.

At around $74 per barrel, crude prices are some 20% lower than the 2023 highs reached in late September, primarily due to global economic uncertainties, expanding production capabilities outside OPEC, and abundant inventories. China's economic struggles further dampen global demand forecasts. Meanwhile, natural gas is trading below $3 on high production and predictions of insipid weather-related demand.

Focus on Value Stocks

Given this weak sentiment, it will be wise for investors to apportion their funds in value stocks. Value investing has always been a popular strategy, and with good reason, too. Historical data suggests that value stocks not only tend to outperform growth stocks but are relatively less volatile compared to them.  

Specifically, for investors who are risk-averse, value investing offers an opportunity to enter the market and grab stocks that have otherwise been overlooked by most, and are thus trading at cheap multiples.

To benefit even more, one might focus on the small-cap universe as opposed to the mid-cap and large-cap stocks.

Why Small Caps?

Owing to their significant growth potential, small-cap stocks (stocks with a market cap of around $1 billion or below) usually tend to outperform their large-cap peers over time. Lest we forget, the majority of today’s large-cap entities were once small businesses and retail investors who took the plunge early have managed to reap massive gains over the years. In fact, some of these lesser-known stocks could turn out to be the next multibagger.  

At the same time, small-cap stocks are considered to be highly volatile and, therefore, riskier than well-known large-cap companies. Nonetheless, the growth potential of small-caps, given the current backdrop of their relative insularity to the coronavirus-forced global supply-chain disruptions, the Fed’s upbeat U.S. economic outlook and strength in the U.S. dollar, appears attractive.

As it is, in the due course of the energy sector’s horrid run year to date, several mid-cap companies (market capital > $1 billion but < $10 billion) with strong fundamentals have become small caps (market capital < $1 billion).

Our Choices

We thus believe that investing in small-cap value stocks could actually be a safer bet as these stocks generally yield high returns and generate exponential gains over time. Moreover, taking into account that such stocks are far more volatile in nature, they possess far higher potential for price appreciation.

However, most of these players are generally not industry giants and hence, a little extra effort must be put in to select the correct stocks. This is where the Zacks Rank, which justifies a company’s strong fundamentals, can come in really handy.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Rank is a reliable tool that helps you trade with confidence regardless of your trading style and risk tolerance. To learn more about how you can use this proven system for market-beating gains, visit Zacks Rank Education

Our research shows that stocks with a Value Score of A or B, when combined with a Zacks Rank #1 (Strong Buy) or 2 (Buy), offer the best opportunities in the value investing space.

NGL Energy Partners LP: It is an MLP that owns water disposal wells, the Grand Mesa oil pipeline, and a wholesale propane/butane business. NGL Energy Partners has done a fairly admirable job of reducing costs. Its cash capital expenditure continues to fall as it keeps spending levels in check. Apart from significant capital cuts, the partnership should realize sizeable savings from headcount reduction and automation.

The fiscal 2024 Zacks Consensus Estimate for NGL Energy Partners indicates 155.6% earnings per unit growth over fiscal 2023. The midstream operator, which carries a Zacks Rank of 1, has a Value Score of A. NGL Energy Partners’ current market cap is roughly $705.8 million.

CrossAmerica Partners LP.: Headquartered in Allentown, PA, wholesale distributor of motor fuels CrossAmerica Partners’ variable rate margins helped it offset the loss in volumes during the pandemic. Further, CAPL’s recent acquisitions of retail and wholesale assets provide it with a wider reach and scale. The stock — with a Value Score of B — has a market cap of around $855 million.

Over the past 60 days, CrossAmerica Partners saw the Zacks Consensus Estimate for 2023 move up 25%. The Zacks Rank #1 firm, which pays out 52.50 cents quarterly distribution to yield more than 9%, beat the Zacks Consensus Estimate for earnings thrice in the trailing four quarters and missed in the other.

Nine Energy Service: Nine Energy Service specializes in offering completion solutions to energy firms within North America and abroad. With a footprint in every major North American basin, the company has a diverse, blue-chip customer base with minimal concentration. NINE is distinguished by its years of experience, strong dedication to delivering intelligent, tailored solutions, and the use of world-class resources to enhance efficiencies.

Over the past 60 days, NINE saw the Zacks Consensus Estimate for 2023 move up 9%. The #2 Ranked oilfield service provider has a Value Score of A. Nine Energy Services’ current market cap is roughly $92.9 million.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

NGL Energy Partners LP (NGL) : Free Stock Analysis Report

CrossAmerica Partners LP (CAPL) : Free Stock Analysis Report

Nine Energy Service, Inc. (NINE) : Free Stock Analysis Report

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