Off the Beaten Path May Lie Some Undiscovered Gems
Posted: April 18, 2017
If I have a choice between a large stock and a small stock, seemingly of equal attractiveness, I’ll take the small stock.
With large stocks such as Apple or Microsoft, you know that a cadre of Wall Street analysts is dissecting their reports, snooping for hints in their press releases, and parsing the body language of company officials who speak at conferences.
With small stocks, there is no such blanket coverage, so there is more room for an alert investor to make gains.
Every April, I try to bring you some undiscovered gems among small stocks. Here are five that look good to me now.
Hibbett Sports
Brick-and-mortar retailers have been getting killed by Internet retailers. People love the convenience of shopping at home with a few clicks.
Hibbett Sports Inc. (HIBB), which retails sporting goods at its more than 1,000 stores, has seen its stock descend from about $45 last fall to about $28 now. Among six analysts who follow it, there is not a single “buy” recommendation.
I think the stocks’ decline is overdone. The balance sheet here is terrific, with debt about 1% of stockholders’ equity. Selling for 10 times earnings (in a market that is expensive at 24 times earnings), Hibbett may be a bargain.
Marcus & Millichap
Marcus & Millichap (MMI) is a commercial real estate broker. It is best known for dealing in apartment buildings, but lately it increasingly deals in industrial properties, office buildings and hotels.
The stock touched $50 in 2015 but has been cut in half since then, trading recently at just under $25. The company has a history of being strongly profitable. In the past six years, only once has it earned less than a 25% return on stockholders’ equity.
Fonar
A minnow in a sea of whales, Fonar Corp. (FONR) makes magnetic resonance imaging (MRI) scanners and runs medical imaging centers. One point of distinction for it is that it makes machines in which the patient can stand up, allowing for images when the patient is weight bearing.
With a market value of only $109 million, Fonar is completely unfollowed on Wall Street. I love it that the stock trades for only seven times earnings, and had a return on stockholders’ equity of more than 32% in 2016.
Parke Bancorp
Parke Bancorp (PKBK) is a small banking company in Washington Township, New Jersey, near Philadelphia. It has shown a profit in each of the past 15 years.
Though its profitability is not spectacular, it has managed to exceed a 1% return on assets (often used as a benchmark for banks) in each of the past three years. The stock is modestly priced at 10 times earnings and 1.4 times book value (corporate net worth per share).
Bridgford Foods
Another very small stock is Bridgford Foods Corp. (BRID). Based in Anaheim, California, the company makes snack foods such as beef jerky and easy baking items such as frozen biscuits.
Its earnings history is spotty: six profits and four losses in the past ten years. But it’s been doing well the past two years, and is close to debt free.
So far as I can tell, no analysts follow Bridgford. It sells for 12 times earnings and 0.7 times revenue. It doesn’t trade every day, so if you’re interested, you should buy it on weakness and not chase it.
The Record
This is the 24th column I’ve written on small stocks. I’m able to tabulate results for 19 of them – all those written from 2000 on.
The average gain on my recommendations in this series has been 17.0%. That decisively beats the average gain of 6.1% on the Standard & Poor’s 500 Index over the same 19 one-year periods. It also beats the average gain of 9.9% on the Russell 2000 Index, a small-stock index. All figures are total returns, including dividends.
In 19 outings, my picks have been profitable 16 times, beaten the S&P 500 Index 13 times, and beaten the Russell 2000 Index 12 times.
Bear in mind that my column recommendations are theoretical and don’t reflect actual trades, trading costs or taxes. Their results shouldn’t be confused with the performance of portfolios I manage for clients. And past performance doesn’t predict future results.
Last year’s results were mixed: I posted a 13.9% return, beating the S&P 500 but not the Russell 2000. HCI Group Inc. (HCI) and Lydall Inc. (LDL) were both up more than 30%, but American Railcar Industries Inc. (ARII) and Astronics (ATRO) suffered single-digit declines.
Disclosure: I own Fonar personally and for almost all of my clients. I own Astronics for one of my clients.