Take advantage of the small-cap premium with these nine leading stocks.
Historically, small-cap stocks have been shown to outperform the rest of the market. There’s no guarantee of greater returns, and there can be long cycles where larger companies lead the way. Over time, however, small caps tend to come out on top in significant part because of greater growth opportunities. A massive company is limited by its existing size. It’d be exceptionally difficult for, say, Apple Inc. (ticker: AAPL) to triple its revenues anytime soon. However a $1 billion company can much more easily grow to be multiples of its current size. Many small caps stay small because they have structural problems, management lacks the capability to grow the business, or their niche simply isn’t large enough to support a bigger enterprise. That said, many small caps graduate to greater things, earning shareholders tremendous returns along the way. These nine small caps have the right characteristics to deliver exemplary performance going forward.
The Duckhorn Portfolio Inc. (NAPA)
The Duckhorn Portfolio is a luxury wine company based out of the Napa Valley in California. Duckhorn has assembled a collection of higher-end wine brands which tend to sell at $30 and above per bottle. Luxury wine has been the fastest-growing segment of the market as consumers have prioritized quality over quantity in alcohol consumption in recent years. Duckhorn launched its initial public offering in 2021 and shares were initially highly valued, selling for as much as 40 times earnings. This was tough to swallow, especially with the pandemic reducing demand for luxury wine at restaurants and special events. However, Duckhorn has continued to report strong results while the share price has come down. This has put the company at a more palatable 23 times forward earnings with analysts forecasting double-digit earnings growth in future years.
Hingham Institution for Savings (HIFS)
There are hundreds of publicly traded banks in the United States. As such, a smaller bank needs a distinctive trait. Based in the Boston area, regional bank Hingham has a strong one: It is the country’s single-most efficient multibranch bank. The efficiency ratio is a metric of bank performance, measuring costs against net income. Like golf, a lower score is better. On average, American banks tend to run in the 55% to 60% range. Hingham’s, by contrast, tends to come in under 30%, which is far ahead of peers. This means Hingham delivers more from its employees, branches and infrastructure than any other bank. That, in turn, leads to exceptionally high and stable profits compared to other banks. Hingham takes minimal credit risk; the bank remained profitable even during the 2008 financial crisis. Despite the current correction, shares are up more than 4,000% since the Gaughen family took control at Hingham in the 1990s.
Northrim Bancorp Inc. (NRIM)
Northrim is another small American bank with a key distinction: It’s one of just a handful of banks headquartered in Alaska. Few banks compete in that state due to its geographical isolation. This, in turn, means that Alaskan banks tend to earn higher returns on their loans. Northrim has generally pulled in a nearly 100-basis-point greater net interest margin than the median American regional bank. Northrim is also a winner during inflationary conditions, such as now. The Alaskan economy is heavily tied to oil and residents receive a petroleum dividend simply for living in Alaska. On top of oil, the state also benefits from higher prices for copper, gold, lumber and other such commodities. Northrim is firing on all cylinders and shares have recently hit new all-time highs. Even still, shares are going for just 8.2 times forward earnings while offering a generous 3.7% dividend yield.
Terran Orbital Corp. (LLAP)
Terran Orbital is a space company that went public via a special-purpose acquisition company, or SPAC, in early 2022. Like most SPACs, Terran Orbital has gotten a cold shoulder from the market with the stock down about 70%. However, Terran isn’t just another fly-by-night SPAC. The company has been in business for a decade and has supported 80 missions while providing more than 200 satellite launch services to the Department of Defense and NASA. Terran’s CubeSat small-satellite platform promises to bring down the cost of many space-related ventures. The business is achieving significant commercial momentum. Revenues topped a $100 million annualized rate last quarter and quarterly revenues grew 171% year over year. The risk here is a lack of profitability. However, Terran just secured a $100 million investment from defense industry heavyweight Lockheed Martin Corp. (LMT) that should alleviate any near-term financing concerns.
Columbus McKinnon Corp. (CMCO)
Columbus McKinnon is an industrial firm focused on logistics. The company is America’s largest player in hoists, and is also active in conveyance solutions, linear motion and automation. In a sentence, Columbus McKinnon makes the belts, lifts and machines that make it easier to move goods around a factory or warehouse floor. Modern logistics rely on a great deal of automation and specialized machinery to optimize processes. Look at new build-outs, such as Amazon.com Inc. (AMZN) warehouses, for examples of what is possible today. Columbus McKinnon stock sold off as much as 50% in 2022 before rallying. This is presumably due to fears of a recession and the bite that would take out of capital expenditure budgets going forward. However, shares have now fallen to less than 12 times forward earnings and stand to benefit as more companies begin building new manufacturing facilities in the United States instead of overseas.
Global Water Resources Inc. (GWRS)
Global Water Resources, despite the ambitious name, is a small water utility primarily serving the Phoenix and Tucson metropolitan areas in Arizona. Arizona is a great market for several reasons. One, it has been one of the fastest-growing states in the country, both in terms of population and economic growth. Warm weather and low taxes have attracted retirees. Meanwhile, big investments in the semiconductor and electric vehicle industries have brought many new workers to the state as well. Global Water also benefits from a regulatory environment which is now encouraging mergers and consolidation among the dozens of subscale water utilities in that state. Global Water has been on the prowl, acquiring more than half a dozen other utilities in recent years. This has given it a large service area, and business will inevitably continue to grow as new suburbs sprout up in the company’s coverage area.
Compania Cervecerias Unidas SA (CCU)
Compania Cervecerias Unidas, or “United Breweries” in English, is Chile’s dominant brewery. It produces more than half of that country’s beer. It also sells soft drinks and other non-alcoholic beverages in Chile. Additionally, it sells beer in Argentina and other South American countries. CCU is also an owner of the Gato Negro wine business, and it exports Chilean Pisco brandy. The Chilean and Argentine economies have struggled in recent years, leading to weak results for CCU and thus its stock price getting cut in half. However, the company is now turning the corner. Sharply higher commodity prices will boost business in both of CCU’s main markets. Meanwhile, South American consumers are finally going out to bars and restaurants again — a process that the World Cup will certainly help to accelerate. CCU shares are currently trading for around 11 times pre-pandemic earnings, making for an absolute steal once economic conditions normalize.
Corporacion America Airports SA (CAAP)
Corporacion America Airports is the world’s largest private airport operator by number of airports held. It holds the leases for all the principal airports in Argentina, along with Brazil, Uruguay and Italy among many others. CAAP stock got slammed during the pandemic as the combination of the travel stoppage and aforementioned Argentine economic problems hit hard. However, the airport operator returned to profitability in 2022 and in its last two quarters has combined for a tremendous 79 cents per share in profits. Annualized, that’d be $1.58 per share in profits for this sub-$9 stock. On top of that, consider that the company’s airport traffic is still well short of pre-pandemic levels. As passenger levels normalize in 2023, profits should continue to grow. Expansions of CAAP airports in Brazil and Italy will further fuel this growth story in coming years.
Northwest Natural Holding Co. (NWN)
Northwest Natural is a Portland, Oregon-based natural gas and water utility. The company is relatively small, generating about $900 million in annual revenues while serving parts of Oregon, Washington state and Texas. Northwest Natural’s main appeal is in its steadily growing dividend. In fact, it has grown its dividend annually for more than 60 years in a row. Few American companies have managed that feat. Northwest Natural is able to deliver such incredible results in large part because utilities are such a conservative business, and management has done nothing to disrupt that inherent stability. NWN stock was expensive in recent years, hitting a peak of $75 a share in early 2020. The combination of rising interest rates and changing economic conditions has driven the stock down to around $48. This puts it at less than 20 times forward earnings and gives Northwest Natural a 4.1% dividend yield.
9 of the best small-cap stocks to buy for 2023:
— The Duckhorn Portfolio Inc. (NAPA)
— Hingham Institution for Savings (HIFS)
— Northrim Bancorp Inc. (NRIM)
— Terran Orbital Corp. (LLAP)
— Columbus McKinnon Corp. (CMCO)
— Global Water Resources Inc. (GWRS)
— Compañia Cervecerías Unidas SA (CCU)
— Corporación América Airports SA (CAAP)
— Northwest Natural Holding Co. (NWN)
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Update 11/18/22: This story was published at an earlier date and has been updated with new information.