Investing in small-cap companies can be both exhilarating and daunting. These smaller companies, typically with market capitalizations between $300 million and $2 billion, have the potential to soar or stumble, making them high-risk, high-reward investments. For those with a keen eye and a bit of courage, the payoff can be significant if the company experiences massive growth.
In this context, I have highlighted three fundamentally sound small-cap stocks, LifeVantage Corporation (LFVN), Hudson Global, Inc. (HSON), and SigmaTron International, Inc. (SGMA). These companies are currently trading at a discount to their peers, making them attractive picks for investors looking to capitalize on undervalued opportunities.
The global economy is on an upswing, with the World Bank recently upgrading its growth forecast to 2.6% for this year, buoyed by robust performance in the United States. The bank’s latest outlook marks an increase from the 2.4% growth for 2024 predicted in January. This positive economic backdrop makes now an excellent time to consider small-cap stocks.
Small-cap stocks, with market capitalizations between $300 million and $2 billion, often present growth prospects that larger companies cannot match. As the economy recovers from a Fed-induced slowdown, small-cap companies are well-positioned to benefit from increased consumer spending and business activity.
Historically, lower interest rates and accommodative monetary policies have bolstered small-cap stocks, and with potential rate cuts on the horizon, the investment landscape looks promising. Over the past 35 years, small- and mid-cap stocks have consistently outperformed their larger counterparts.
According to Yahoo Finance, from February 1989 to February 2024, large-cap stocks returned 1,664%, while small-caps and mid-caps boasted returns of 2,062% and 3,176%, respectively. This historical outperformance underscores the potential of small-cap investments, particularly in the current economic climate.
Given these favorable trends, let’s take a look at the fundamentals of the stocks mentioned above.
LifeVantage Corporation (LFVN)
LFVN engages in identifying, researching, developing, formulating, selling, and distributing nutrigenomic activators, dietary supplements, nootropics, pre- and pro-biotics, weight management, skin and hair care products, bath and body, and targeted relief products. It has a market cap of $80.20 million.
On March 15, the company paid its shareholders a quarterly dividend of $0.04 per share. The company pays an annual dividend of $0.16, which translates to a 2.54% yield higher than the four-year average yield of 2.38%.
In February, LFVN expanded its LV360 initiative into Canada, Mexico, and several European markets, including the United Kingdom, Ireland, Germany, Austria, Belgium, Spain, and the Netherlands. The Evolve Compensation Plan and Rewards Circle program, effective February 1, offers Independent Consultants diverse income streams and team-building opportunities.
This expansion follows a successful launch in the United States, Australia, New Zealand, and Japan last March. LFVN aims to stay competitive in the direct selling market by leveraging consumer and gig trends to attract a growing customer base.
In terms of forward non-GAAP P/E, LFVN is trading at 9.68x, 43% lower than the industry average of 16.98x. Likewise, the stock’s forward EV/Sales and Price/Sales multiples of 0.38 and 0.40 are 77.9% and 67.2% lower than their respective industry averages of 1.70 and 1.21.
LFVN’s trailing-12-month gross profit margin of 79.32% is 124.8% higher than the 35.29% industry average. Likewise, its trailing-12-month levered FCF margin and ROTA of 6.93% and 5.87% are 21.7% and 24.9% higher than the respective industry averages of 5.70% and 4.70%.
In the second quarter, which ended December 31, 2023, LFVN reported revenue and gross profit of $51.62 million and $40.56 million, respectively. The company’s non-GAAP net income and adjusted EPS amounted to $ 1.37 million and $0.10 compared to the prior year's losses of $823 thousand and $0.07 per share, respectively. Also, its adjusted EBITDA improved by 289% from the year-ago value to $3.09 million.
For the fiscal first quarter ending September 2024, LFVN’s revenue is expected to amount to $49.63 million, while its EPS is forecasted to settle at $0.16. Further, its EPS and revenue are expected to rise 7.7% and 1.8% year-over-year to $0.70 and $205.84 million, respectively, in the fiscal year ending June 2025. Moreover, it topped the consensus EPS estimates in three of the trailing four quarters.
The stock has gained 52.8% over the past year to close the last trading session at $6.29.
LFVN’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of A, equating to a Strong Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted optimally.
It has an A grade for Value, Sentiment, and Quality. It is ranked #2 out of 10 stocks in the A-rated Medical – Consumer Goods industry. To see additional LFVN ratings for Growth, Momentum, and Stability, click here.
Hudson Global, Inc. (HSON)
With a market cap of $46.97 million, HSON provides talent solutions for mid-to-large-cap multinational companies and government agencies under the Hudson RPO brand in the Americas, the Asia Pacific, and Europe. It offers recruitment process outsourcing (RPO) services and RPO contracting services.
On March 12, HSON announced the acquisition of Executive Solutions, a talent solutions company based in Dubai. This acquisition provides the company access to the large and rapidly growing United Arab Emirates (UAE) market.
Jeff Eberwein, CEO of Hudson Global, said, “The acquisition of Executive Solutions further expands our global footprint and client base and brings significant value to our shareholders. We are excited to expand our footprint in the Middle East market and participate in the significant growth opportunities this region has to offer as we continue to execute our strategy of global expansion through organic and inorganic growth.”
In terms of forward EV/Sales, HSON is trading at 0.16x, 90.8% lower than the industry average of 1.74x. Likewise, the stock’s forward Price/Sales and Price/Cash Flow multiples of 0.28 and 8.33 are 80.1% and 35.6% below their respective industry averages of 1.41 and 12.93.
Moreover, the stock’s trailing-12-month asset turnover ratio of 2.44x is 212.9% higher than the 0.78x industry average.
HSON’s revenue for the first quarter that ended March 31, 2024, came in at $33.89 million. Its total operating expenses decreased 14.2% year-over-year to $36.93 million. Additionally, the company used $1.80 million in cash flow from operations during the first quarter, compared to an outflow of $5 million in the same period last year. As of March 31, 2024, its cash and cash equivalents stood at $20.41 million.
Analysts expect HSON’s EPS for the third quarter ending September 2024, to increase 16.7% year-over-year to $0.28. Its revenue for the current quarter is expected to grow 15.2% year-over-year to $45.38 million.
Over the past month, the stock has gained 3.2% to close the last trading session at $15.74.
It’s no surprise that HSON has an overall rating of A, which translates to a Strong Buy in our POWR Ratings system.
It has an A grade for Value and Sentiment and a B for Quality. It is ranked first in the A-rated Outsourcing – Staffing Services industry. Click here to see the other HSON ratings for Growth, Momentum, and Stability.
SigmaTron International, Inc. (SGMA)
SGMA provides a range of electronic manufacturing services (EMS), specializing in printed circuit board assemblies, electro-mechanical subassemblies, and fully assembled electronic products. Additionally, the company offers comprehensive support services, including assembly and testing, material sourcing, engineering support, design, warehousing, distribution, compliance reporting, and regulatory approval assistance. It has a market cap of $34.37 million.
In terms of trailing-12-month non-GAAP P/E, SGMA is trading at 5.64x, which is 81.1% lower than the industry average of 29.81x. The stock’s trailing-12-month EV/EBITDA of 5.37x is 71.1% lower than the industry average of 18.57x. Also, its trailing-12-month EV/Sales multiple of 0.32 compares to the industry average of 3.13.
SGMA’s trailing-12-month ROCE and ROTC of 8.96% and 6.22% are 109.8% and 130.2% higher than the respective industry averages of 4.27% and 2.70%. Likewise, its 1.54x trailing-12-month asset turnover ratio is 147.5% higher than the 0.62x industry average.
SGMA’s net sales for the third quarter, which ended on January 31, 2024, increased 3.4% year-over-year to $95.92 million. Its net income amounted to $599.01 thousand and $0.10 per share compared to the prior-year quarter’s loss of $23.08 million and $3.81 per share. The company’s net cash inflow from operating activities stood at $16.84 million, compared to an outflow of $27.65 million in the same period last year.
Shares of SGMA have gained 74.5% over the past year and 87.9% year-to-date to close the last trading session at $5.66.
SGMA’s POWR Ratings reflect its solid prospects. The stock has an overall rating of A, which translates to a Strong Buy in our proprietary rating system.
It has an A grade for Growth and Value and a B for Momentum, Sentiment, and Quality. SGMA is ranked first out of 38 stocks in the B-rated Technology - Hardware industry. In addition to the POWR Ratings highlighted above, one can access SGMA’s Stability rating here.
What To Do Next?
43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.
LFVN shares were trading at $6.32 per share on Tuesday afternoon, up $0.03 (+0.48%). Year-to-date, LFVN has gained 6.42%, versus a 15.97% rise in the benchmark S&P 500 index during the same period.
About the Author: Shweta Kumari
Shweta's profound interest in financial research and quantitative analysis led her to pursue a career as an investment analyst. She uses her knowledge to help retail investors make educated investment decisions.
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