The Russell 2000 index of small-cap stocks has dropped 22% this year, and that may have created some buying opportunities.
Small-cap stocks began May about 21% undervalued, compared with 12% for large-cap stocks, according to Morningstar’s measures.
“Given that small-company stocks have underperformed large-company stocks so far this month, small companies as a group remain the better bargains today,” wrote Susan Dziubinski, director of content for Morningstar.
“We encourage long-term investors interested in small-cap stocks today to favor significantly underpriced stocks of small companies with economic moats.”
She put together a list of the 10 most undervalued small companies with economic moats on Morningstar analysts’ coverage list. Here are five of them. All data are as of May 6.
Altice USA (ATUS)
Price/fair value: 0.37
Economic moat: Narrow
This telecommunications-services provider's stock has fallen 37% this year and 72% in the past 12 months, Dziubinski notes. Morningstar analyst Mike Hodel expects this volatility to continue, “thanks to Altice’s heavy debt load and an ambitious investment strategy of aggressively upgrading and expanding fiber networks," Dziubinski wrote.
“Yet we think the company possesses a strong network and is an opportunity for long-term investors.”
Rocket Cos. (RKT)
Price/fair value: 0.45
Economic moat: Narrow
“Best known for its Rocket Mortgage segment, this small company has distinguished itself by operating as an entirely digital lender,” Dziubinski wrote. “Investors have clobbered Rocket Cos.' stock, as interest rates have risen and mortgage refinance activity has stalled. But we think the company remains in a strong competitive position.”
Boston Beer (SAM)
Price/fair value: 0.5
Economic moat: Narrow
“Rampant supply chain and input cost inflation crushed Boston Beer’s margins during the first quarter, and investors have crushed Boston Beer stock, too,” Dziubinski wrote. But Boston Beer is well positioned to boost market share with new-product launches, says Morningstar analyst Jaime Katz.
“This small company has boasted a meaningful growth profile that mainstream beer lacks,” Dziubinski wrote.
Malibu Boats (MBUU)
Price/fair value: 0.52
Economic moat: Narrow
“A leading designer of power boats in the U.S., Malibu Boats has enjoyed strong demand thanks to its innovative products and high-quality brand,” Dziubinski wrote. The company has used its brand strength to expand into adjacent categories, such as trailers and accessories, says Morningstar analyst Jaime Katz.
Nordstrom (JWN)
Price/fair value: 0.56
Economic moat: Narrow
Department-store chain Nordstrom remains a top operator in the competitive U.S. apparel market, says Morningstar analyst David Swartz. “In particular, we like the small company’s loyal customer base and differentiated products and services, and we think it has competitive advantages over other apparel retailers,” Dziubinski wrote.
