3 Small-Cap Stocks Flashing Buy Signals

By TradeSmith Research Team

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As we said on Friday, Mark Twain is credited with sharing the wisdom that history doesn’t repeat itself but often rhymes.

In the investing world, Senior Analyst Mike Burnick believes that this year’s market has rhymed a lot with the market of the 1970s. The ’70s experienced a war that spiked energy prices, soaring inflation, and the crushing devaluation of growth stocks.

The bad news is that the parallels between then and now are striking, and the outcome of this replay of that ’70s market is likely to be a long series of rolling bear markets and large trading-range swings.

But the good news is that there will also be sharply higher bull markets in between.

And the even better news is that Mike has a road map that can allow you to take advantage of those bull markets.

Part of following that road map for success involves owning shares of small-cap companies.

These are companies with market caps generally between $300 million and $2 billion, and they can make for attractive revenue growth stories.

For example, Microsoft Inc. (MSFT) generated $168 billion in revenue in 2021, a 17% increase from the $143 billion generated in 2020. On its own, generating that much money is a massive accomplishment, but the percentage increase doesn’t excite most analysts or investors.

What does get people excited is hearing that a company went from bringing in $100 million in 2020 to bringing in $200 million in 2021, which would be a 100% increase in revenue.

And that excitement leads to more analysts covering the company, more talking heads on financial news shows pounding the table to buy the company, and more investors running out to buy the stock.

What we’re trying to help our readers do is get ahead of all that so that when the average investor finally realizes they should be buying small-cap stocks, you’re well ahead of the game and can make the biggest gains.

Using history as our guide, we can look to how stocks performed after the 1973 to 1975 recession.

When the economy began to recover in the spring of 1975, it was small-cap stocks that led the way one year later. While large-cap stocks offered a 28% return, small-cap stocks offered more than double that return at 58%.

Finding small-cap stocks isn’t challenging, as the S&P Small Cap 600 Index (SML) tracks 600 of them.

But what is challenging – and massively time consuming – is knowing whether any of those stocks are worth investing in.

That is, unless you have TradeSmith in your corner.

With our proprietary Health Indicator, we can instantly analyze which companies are in our healthy Green Zone, which makes them considered “buys.” As of this writing, almost 35% of companies tracked by the Small Cap 600 Index are in the Green Zone.

For this issue of TradeSmith Daily, we’re going to share three snapshots of companies that are tracked by the Small Cap 600 Index to put new opportunities on your radar.

Small Cap No. 1: TreeHouse Foods Inc. (THS)
Opening Share Price as of Nov. 15: $47.90
Market Cap: $2.6 billion

Snapshot: With food on the grocery shelf getting more expensive, one of the beneficiaries has been private brands.

For four consecutive years, sales growth for private brands has outpaced sales growth for name brands.

While this trend began before the pandemic, supply chain disruptions and limited availability caused even more folks to switch to private-label brands because they were the only things left on the shelf. Additionally, as inflation started to soar, people started turning to private labels that offer cheaper prices than name brands but similar quality.

In June 2022, a Food Industry Association survey found that 41% of shoppers are buying more private brands than they were before the pandemic.

TreeHouse Foods provides everything from pretzels to cookies to in-store bakery items for grocery stores and food service companies.

THS is considered to have medium risk with a Volatility Quotient (VQ) of 27.97% and is owned by Ray Dalio, according to our Billionaires Club.

Small Cap No. 2: HealthStream Inc. (HSTM)
Opening Share Price as of Nov. 15: $25.56
Market Cap: $764 million

Snapshot: HealthStream works with organizations such as the American Red Cross, the American Association of Critical-Care Nurses, and the American Academy of Pediatrics, to name a few, in different areas of medical training and organization.

These include:

  • Improving staff readiness and competency in resuscitation.
  • Delivering everything an organization needs to request, gather, and validate information about a provider.
  • Providing scheduling tools and predictive analytics for daily patient demand.
HealthStream recently reported net income of $3.7 million and revenue of $67 million, a 144% increase from the previous year. It also predicts net income to finish between $10.8 million and $11.7 million for the year, which would be an increase of nearly 200% at the low end.

This isn’t a company raking in billions of dollars like Microsoft, but it is a company that can triple or quadruple its revenue and increase its net income over the next few years because it has the room to do so.

HSTM is considered to have medium risk with a VQ of 24.43%.

Small Cap No. 3: Marten Transport Ltd. (MRTN)
Opening Share Price as of Nov. 15: $20.67
Market Cap: $1.6 billion

Snapshot: Marten Transport provides temperature-controlled transportation for food and other packaged goods within the United States, Mexico, and Canada.

It offers straightforward transportation services, and there is a big, straightforward reason to like the company.

Marten has moats.

There are many barriers to starting a transportation service. You need to have not just the capital for leasing and purchasing the vehicles, but also the technical know-how to make sure the temperature controls are working. Marten has both.

On top of that, the company is also finding an edge in an industry that faces record numbers of unfilled driver jobs.

Executive Chairman Randolph Marten elaborated on this in the company’s Q3 earnings report:

“We continue to drive strong fleet growth with our approach to overcoming the national shortage of qualified drivers of applying a heightened emphasis on structurally improving our drivers’ jobs and work-life balance by collaborating with our customers, while also increasing our driver compensation. This growth provides momentum to the coming quarters as we began this year’s fourth quarter with 199 more of the industry’s top drivers than we employed at the beginning of the third quarter – and have now increased our number of drivers by 621, or 22.6%, since June 30, 2021.”

The company reported net income of $25.6 million for Q3, which continues an impressive streak of 15 consecutive quarters of year-over-year (YoY) profit growth.

A bonus for MRTN shareholders is that it also pays a dividend, which currently has a yield of 1.18%.

While not the largest yield you’ll ever see, this is a company that could offer the perfect combo of stock-price appreciation AND income through dividend payouts.

Like the first two companies we’ve shared, MRTN is also considered to have medium risk with a VQ of 28.77%.

Before signing off, we have a quick question.

Would you like to see more coverage on small-cap stocks in the year ahead in TradeSmith Daily?

Let us know here.