The stock market’s volatility continues. With many large S&P 500 firms posting weakened earnings and challenging outlooks for 2023, investors are approaching many of America’s corporate giants with extra caution. However, there are alternatives to investments in these behemoth companies.
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Oftentimes, companies which fly under the radar can avoid much of the broader market chaos. And, in particular, small-cap stocks tend to be more domestic in nature, which insulates them from the geopolitical shocks and foreign exchange swings which have tripped up many multinational companies lately. In addition to these specific advantages, U.S. small-cap stocks have historically outperformed their larger peers by a significant margin over a long time horizon. With that in mind, these nine companies look like some of the best small-cap stocks to buy for 2023 and beyond:
— Pactiv Evergreen Inc. (ticker: PTVE)
— Diversey Holdings Ltd. (DSEY)
— Delek US Holdings Inc. (DK)
— Fastly Inc. (FSLY)
— Duckhorn Portfolio Inc. (NAPA)
— Ruth’s Hospitality Group Inc. (RUTH)
— Beazer Homes USA Inc. (BZH)
— Bank of N.T. Butterfield & Son Ltd. (NTB)
— First of Long Island Corp. (FLIC)
Pactiv Evergreen Inc. (PTVE)
Pactiv Evergreen is a company focused on specialty packaging products. It makes items such as beverage cartons, cups and lids, tableware and food containers. While the company has a market cap of just $2 billion, it generates $6 billion in annual revenue. That speaks to how out-of-favor the company is, with shares selling for just 0.3 times revenue. The investor apathy is somewhat understandable, as packaging is a low-margin business with lots of competition. That said, the discount appears to be too large here. Pactiv is currently selling for just six times earnings. And earnings should benefit as recent supply chain and inflationary issues lessen in 2023. The company does have a lot of debt, but it is taking advantage of its sizable earnings to pay down its obligations. As Pactiv strengthens its balance sheet, shares could move to a higher valuation. In the meantime, shareholders can enjoy a sturdy 3.6% dividend yield.
Diversey Holdings Ltd. (DSEY)
Diversey is a company focused on sanitation and hygiene services. It is the second-largest firm in America in this category, though it is far smaller than the leader, Ecolab Inc. (ECL
). Therein lies the investment opportunity. Ecolab has a market cap of greater than $40 billion and trades for 33 times forward earnings. Diversey’s valuation is around $2 billion and trades for less than 15 times forward earnings. Now, to be fair, there’s an explanation for this. Diversey recently went public after being owned by private equity. Previous ownership seems to have mismanaged the business, and it earns far lower profit margins than Ecolab. There is some skepticism that Diversey can catch back up to Ecolab on a competitive level. But with Diversey stock down more than 60% from its 2020 IPO, that risk is reflected in the share price. Meanwhile, Diversey should benefit as its key clients like restaurants and hotels see business continue to recover from the pandemic disruption.
Delek US Holdings Inc. (DK)
Delek is an energy company
which is principally involved in the refining, transportation, and distribution of oil and refined goods, such as gasoline and jet fuel. The company operates four refineries across the southern part of the United States. Delek also operates three biodiesel plants which can produce up to 40 million gallons of biodiesel per year. Refining tends to be a cyclical boom-and-bust industry with big swings in profitability. Its cycle can be fairly different from that of crude oil, as refining profits are determined by the difference between the price of oil and the price of gasoline, asphalt, heating oil and other refined goods.
In 2022, refining had a tremendous year thanks to supply chain disruptions and elevated demand for petroleum products. However, profits should remain strong as the domestic refining industry benefits from the boom in American oil production. Delek shares trade for about nine times forward earnings.
Fastly Inc. (FSLY)
Fastly was formerly far more than a small-cap stock. For a brief shining moment, FSLY stock hit $120 per share during the recent tech boom as the sky was the limit for companies providing cloud computing infrastructure. Since then, however, economic reality has weighed on the sector. Fastly shares are now down more than 90% from their 2020 peak. Fastly has grown revenues at a rapid clip, but it wasn’t able to control its operating costs during that period. As a result, the company remains unprofitable today, even as adoption of its product has boomed.
The good news is that Fastly’s edge computing services remain in high demand. The company has more than $400 million in annual revenues and continues to grow at a double-digit annualized clip. With an enhanced focus on efficiency, Fastly should be able to reach profitability over time. Meanwhile, the market cap has slipped to just $2 billion, making this a fine price if Fastly can start generating profits.
Duckhorn Portfolio Inc. (NAPA)
Duckhorn Portfolio is America’s largest publicly traded winery. The company went public in 2021, which was an eventful time to be trying to sell wine given the disruptions at bars and restaurants. However, Duckhorn has prospered nonetheless. The company has focused primarily on luxury wines, going for bottles with price points closer to $50 instead of lower-end fare. This pricing power helps ensure Duckhorn’s profits and makes the product stand out from a crowded field of wineries.
[See: Artificial Intelligence Stocks: The 10 Best AI Companies.]
Luxury brands also tend to receive higher price-earnings multiples
from the market. Indeed, Duckhorn shares traded above 40 times earnings at one point. However, shares have now pulled back to below their IPO price and sit at just 24 times forward earnings today. Analysts expect the company to grow revenues at about 8% per year and earnings to rise at a double-digit rate going forward. That’s an attractive entry point for this leading Napa Valley wine producer.
Ruth’s Hospitality Group Inc. (RUTH)
Ruth’s Hospitality is the corporate parent of the high-end steakhouse chain Ruth’s Chris. The company has 150 domestic restaurants, with a nearly 50/50 split between company-owned and franchisee locations. It has another 23 locations overseas in markets as far away as Japan, Hong Kong and Singapore. While that’s a small store count by chain standards, Ruth’s Chris makes up for it on volume. In 2019, the average company-owned location brought in a mouth-watering $5.5 million of revenue. That figure should climb to new highs going forward as the restaurant industry recovers from the pandemic. Additionally, Ruth’s Chris formerly focused just on dine-in, but has embraced digital channels over the past couple years. Shares declined in 2022 amid surging beef prices, which hit margins. But as inflation recedes, profits should grow. As it is, shares trade for just 14 times earnings and offer a 3.7% dividend yield
.
Beazer Homes USA Inc. (BZH)
Beazer Homes is a nationwide homebuilder currently operating in about 20 different American metropolitan areas. Shares are trading for just two times trailing earnings, which is pretty incredible. Beazer indeed enjoyed a boom period selling homes during the recent upturn in the housing market. However, things are set for a more difficult couple years amid surging interest rates
and declining home affordability. But things might not be as bad as the stock price suggests.
Analysts see earnings falling by about 50% in 2023, which would still put the stock at just four times forward earnings. The company saw revenues fall just 2% year over year in its recently reported first-quarter results. While demand has slowed, Beazer’s average selling price per home surged 22% to $533,000 to offset much of that. Activity will slow further before housing turns the corner but, at this level of profitability, Beazer may still construct outsized shareholder returns going forward.
Bank of N.T. Butterfield & Son Ltd. (NTB)
Bank of N.T. Butterfield & Son is a specialty bank serving a few island economies including Bermuda, the Cayman Islands and the Channel Islands. This makes for an appealing niche business, as these are geographically isolated areas that have a lot of wealthy clients. This leads to attractive profit margins as N.T. Butterfield can serve these well-heeled customers while facing limited competition. To that point, the bank has greater than 30% market share in both Bermuda and the Cayman Islands. The bank has conservative leadership and also generates roughly a third of its revenues from fees, which lowers its exposure to fluctuations in interest rates. Investors shouldn’t expect earnings to grow too quickly, given it serves fairly sleepy markets where it already has a dominant market presence. However, shares go for less than eight times forward earnings while paying a 4.7% dividend yield, making this an attractive income holding.
First of Long Island Corp. (FLIC)
First of Long Island is a regional bank focused on the New York City metro area. The bank was founded in 1927 and is coming up on a century serving its local community. First of Long Island has built a solid franchise by focusing entirely on real estate. That is to say the bank’s lending is entirely for apartments, commercial real estate, home mortgages, and other property-related financing. There are no credit cards, car loans or other such consumer loans. This keeps operating costs down and tends to reduce credit risk.
As the New York City area is a massive market, there have been plenty of real estate loans, particularly in the apartment area, to support the bank’s growth over the decades. Shares are intriguing now as they trade for less than $18. That’s a big discount to the $24 level at which it traded prior to the pandemic. Shares are now at less than nine times earnings and yield 4.8%. As the bank has grown at an 8% compound annual growth rate over the past decade, this could turn into an excellent growth and income investment.
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9 Best Small-Cap Stocks to Buy in 2023 originally appeared on usnews.com
Update 02/16/23: This story was previously published at an earlier date and has been updated with new information.
