With Small Cap stocks stuck in neutral this year from a performance standpoint, it is worthwhile reporting on this undervalued subset of the stock market even as Large Cap stocks have marched higher lately, propelled by a handful of A.I.-oriented companies like Nvidia and Microsoft.
Smaller stocks, which are less concentrated around A.I. (and Technology overall), have not kept pace with the big-company advance. Of course, I am not complaining about the A.I. megatrend; the broadly diversified portfolios my team and I manage have benefited handsomely, but investor (and broad market index) allocations have shifted out of balance given the performance differences, meaning the historical performance advantage and diversification benefits from Small Cap stocks are likely to be underappreciated when the winds change.
BETTER GROWTH FROM SMALLER COMPANIES
While both groups have seen earnings expand handsomely, Small Cap stocks have grown their sales at a faster clip than Large Cap stocks, at least since Russell started publishing index-level data in 1995.
Sales for many Small-Cap stocks are also skewed toward the U.S., which helps shield them against a strong dollar and currency volatility. A strong U.S. dollar has been cutting into revenue and profitability figures for larger U.S.-based companies as the value of sales and earnings made in euros, pounds and other currencies are worth less after translations back into greenbacks.
With persistent inflation also a headwind in many global markets and corporate profit margins for many multinational companies under pressure, the inclusion of exposure to U.S.-centric companies would seem to be of particular interest.
BARGAIN IN THE OIL PATCH
While many oil stocks are very large in capitalization, a rollup of several oil and gas E&P operators in recent years had led relatively unknown Civitas Resources (CIVI) to bill itself as the largest pure-play oil & gas producer in Colorado, with recent transactions extending operations into the ever-popular Permian Basin.
The company now produces about half of its oil equivalent sales volumes from the Permian, with the remainder coming from assets predominantly scattered across the Denver-Julesburg Basin of the Rocky Mountains. I appreciate that CIVI claims to have industry-low lease-operating and per-barrel expenses with sales volumes that consist of 47% oil and the remainder a combination of gas and natural gas liquids.
With shares running in place over the past couple of years, I find the earnings multiple remarkably low (currently at less than 6 times NTM adjusted EPS expectations). I also can’t help but like the fixed-plus-variable lucrative dividend policy. Annualizing the most recent $1.50 per share upcoming payout (with $0.50 fixed and $1.00 variable) puts the effective dividend yield above 8%.
This article was adapted from The Prudent Speculator (of which I am Editor) and its latest Investment Insight. Access the full article on our site: Investment Insight: Small Cap Stocks Should Be In Your Portfolio.
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