Finding the Best Small-Cap “Trinity” Stocks

By TradeSmith Research Team

Listen to this post
The small-cap benchmark Russell 2000 is lower today than it was before the COVID-19 pandemic.

That sounds… crazy. The idea that ANYTHING can be priced lower today than before 2020 flies in the face of the tremendous money printing that era brought about.

And yet, small-cap stocks are at a five-year low. Take a look.

This naturally begs the question…

Is this a signal that we should be loading up on small-cap stocks? That the selling is overdone?

My friend and contributing TradeSmith Daily editor Lucas Downey certainly thinks so. Here’s what he said to me after I pointed this out last week.

And Lucas has already shown that the Russell 2000 is at its cheapest level relative to the S&P 500 in nearly 25 years.

The evidence suggests now is a great time to go hunting for great small-cap stocks.

Problem is, many stocks in that universe are junk. They’re small-caps for a reason — nobody’s buying them.

So how do we pick out the best ones?

Trinity Stocks

The beauty of being part of TradeSmith is having access to its world-class data analytics.

Our toolkit helps you slice and dice the market any which way to find exactly the opportunity you’re looking for.

Want to know the most oversold (or overbought) sector? Check.

The stocks making the biggest daily gain or loss? We got you.

How about the one that’s soared the most over the last year, six months, or one month? Got that, too.

These filters can help us narrow the search, weeding out anything that’s overbought or in a downtrend.

But today, in our hunt for great small-cap stocks to buy, we need a confluence of strong factors to help separate them from the pack.

For that, I’m looking at our list of what we call “Trinity Stocks.”

Trinity Stocks represent the crème de la crème of the stock market. They hold three rare qualities that have historically proven to indicate success:

  1. A high Business Quality Score (BQS), a composite of key fundamental factors that every business needs to get right.
  2. A cheap valuation, indicating you’re paying a good price for what you’re getting.
  3. An uptrend. As Will Rogers once said: “If it don’t go up, don’t buy it.”
And right now, as I pull up the list of Trinity Stocks on our recently released TradeSmith Analytics website, a few small-cap names catch my eye.

Let’s quickly run through what each of these businesses do.

1. New York-based Hudson Technologies (HDSN) appears to be one of those painfully boring, but painlessly effective companies. It sells and services the parts needed to run refrigerators and natural gas lines.

The stock has an unusual chart, not how you’d generally expect a stock to behave over the last five years.

A slew of earnings misses and debt problems beginning in 2018 created great volatility that lasted through the end of 2019, slashing its stock price down more than 95%.

The stock began a steady uptrend at the start of 2020, though, which has since taken it more than 2,500% higher, to its highest level since 1996.

This appears to be one heck of a comeback story. HDSN’s BQS currently sits at 96.4, telling us it’s clearly sorted out its debt issues. And with a P/E ratio of 8.9, less than half the Materials sector average of 22.4, there seems to be plenty of room to run.

Designer Brands (DBI) is an e-commerce footwear retailer. Again, one of those simple but timeless businesses — selling shoes.

I actually received a coupon from them in my physical mailbox just a few days ago. So, that should give you a sense of how plainly ordinary and even classic this business is. The company’s been trading publicly since 2005, as well.

Here’s the chart.

Momentum, particularly in the last several months, has been strong. The stock is up more than 75% since June, performance that’s roughly opposite the broad market’s trend.

DBI holds an extremely cheap valuation for the e-commerce and retail space, with a P/E ratio of just 5.3 compared to the sector average of 22.23.

It pays a dividend of $0.20 per share, though its track record on that dividend is spotty. It’s shrunk over the last 10 years, and is now paying out its smallest in the company’s history.

Still, for those looking for exposure to a very cheaply valued stock in the consumer cyclical and e-commerce retail sectors, DBI is worth keeping an eye on. Its recent, resilient uptrend and high BQS of 96.5 make for a compelling idea.

Genie Energy (GNE) really stuck out to me on the Trinity list because, well, I own it. So, there’s your disclosure. Keep that in mind as you read on.

I’ve been doing a lot of research on energy stocks this year, and stumbled across GNE a few months back. What stuck out to me was how the company straddles the line between legacy and renewable energy resources. It services residential and small-business customers with electricity and natural gas, while at the same time developing solar panel projects for commercial and industrial customers.

It, like a lot of energy stocks, has held up well in 2022 and 2023.

The momentum alone should be enough to get our attention, but the valuation and dividend are compelling, too.

The stock trades at just 8 times earnings, which is great relative to the S&P 500, which sits at 23.6, but is actually a smidge expensive compared to the broader energy market at 7.9 times earnings. For context, Exxon Mobil (XOM), a stock about 800 times bigger than GNE, also holds a cheap valuation at 8.6 times earnings.

GNE also has a solid dividend history, with its $0.07-per-share dividend paid out consistently since 2017.

The list of Trinity stocks, as well as a bunch of other useful metrics, is continually updated on the free-to-use (for now) TradeSmith Analytics dashboard.

To your health and wealth,

Michael Salvatore
Editor, TradeSmith Daily