Five Candidates for a Small-Stock Comeback

Posted: April 16, 2024

By John Dorfman

April 15, 2024, (Maple Hill Syndicate) – Waiting for small stocks to stage a comeback is like:

(a)   Watching grass grow

(b)   Watching paint dry.

(c)   Watching snails race

(d)   All of the above.

The answer of course is (d). This year through April 12, large-capitalization stocks (as represented by the Standard & Poor’s 500 Total Return Index) have risen 7.86%. Small-capitalization stocks (measured by the Russell 2000 Index with dividends reinvested) have declined 0.8%.

As a small-cap fan, I wish that were an anomaly. Alas, it’s not. Large-cap stocks have beaten small-caps eight of the past 10 years, including the past three years in a row.

Generally, large-cap stocks are more international, more stable, and have a fatter cushion against setbacks. But I’m fond of the small-caps, which are often more innovative, quicker to change strategy when needed, and less covered by Wall Street.

I feel that individual investors have a better chance to find undiscovered gems among the small fry.

Here are five small-cap stocks I like now.

Dorian

Dorian LPG Ltd. (LPG) owns a fleet of 22 ocean tankers for transporting liquefied petroleum gas (mainly propane and butane) internationally. It has a spotty earnings history but has been racking up strong profits the past two years. Its net profit margin recently was 55%.

Most Wall Street analysts give Dorian a tepid “hold” rating. But I think the stock is attractive at nine times estimated earnings for the fiscal year that recently started.

Photronics

Hailing from Brookfield, Connecticut, Photronics Inc. (PLAB) makes photomasks, which are used in manufacturing integrated circuits and flat-panel displays. Only three Wall Street analysts cover it, and only one of them recommends it.

The stock looks appealing to me, nonetheless. Earnings were up 24% in the past year, and have averaged a 19% annual increase over the past decade. The stock sells for 12 times earnings, or about half the ratio for the median stock these days.

International Money

International Money Express Inc. (IMXI) helps people from Latin America who are working in the U.S. to send money home. The company has more debt than I normally prefer, but has grown its earnings more than 23% per year over the past five years.

The company uses Latin American retail stores as its agents, giving them a cut of fees. It says that its price point is higher than Western Union (WU) or MoneyGram, but that its service is better and its app easier to use.

Some people may shy away from this stock, reasoning that Donald Trump, if elected President again, may choke off immigration from Latin America (both legal and illegal). I don’t know who will win the election, but I think the forces behind Latin American immigration are strong and will persist.

Quanex

Quanex Building Products Corp. (NX), with headquarters in Houston, Texas, makes windows, doors and other building products. It has shown a profit in eight of the past ten years.

In one of those paradoxes in which Wall Street abounds, most analysts foresee fairly flat earnings ahead and their average price target for the stock is only $38.50, compared to an April 12 price of $35.87. Yet four of the five analysts who cover the stock recommend it.

I’m a bit more optimistic than the analysts, mostly because I think that interest rates (including mortgage rates) may come down a peg or two fairly soon.

John B Sanfilippo

Nuts, anyone? John B. Sanfilippo & Son Inc. (JBSS) processes peanuts, almonds, cashews and other nuts, and sells them under both its own brands (Fisher, Orchard Valley Harvest, Sunshine Country) and as house brands. It has a 15-year profit streak going, and has grown earnings at an 11% annual clip over the past decade. It’s almost completely ignored by Wall Street.

The Record

Over the years, I’ve written 26 columns recommending a few small-cap stocks. The average one-year return (including dividends) has been 16.2%. That compares with 8.5% for the Standard & Poor’s 500 Total Return Index and 10.3% for the Russell 2000 Index of small-caps.

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.

My picks from a year ago doubled the Russell index but just edged out the S&P, 25.7% to 25.4%. Warrior Met Coal Inc. (HCC) was the best performer, up 66.6%. Intrepid Potash Inc. was the worst, down 25.8%.

Disclosure: I own International Money Express and John B. Sanfilippo personally and for most of my clients. I own Warrior Met Coal in a hedge fund I manage.

John Dorfman is chairman of Dorfman Value Investments LLC in Boston, Massachusetts. His firm or clients may own or trade securities mentioned in this column. He can be reached at jdorfman@dorfmanvalue.com.