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Even as market commentators debate whether the stock market can continue making a comeback this year, it’s best not to sit on the sidelines. Although uncertainty remains high, there are many strong investing opportunities out there, particularly in areas such as overlooked small-cap stocks. Overlooked, under-the-radar, whatever you want to call it, these are the stocks that are currently underappreciated by the overall market. Selecting the most promising names in this category could be a winning move, in two ways.
First, given their out-of-favor status among investors, these stocks trade at low valuations. This may limit downside risk, in case the market experiences another major sell-off this year. Second, again because of their respective low valuations, these stocks have outsized upside potential compared to more popular plays. This is due to either company-specific catalysts or in some cases, the fact that they are in oversold sectors that could come back in vogue, as the macro situation normalizes. With this in mind, consider now the time to add these seven overlooked small-cap stocks to your portfolio. Each of these hidden gems has the potential to produce market-beating returns.
City Office REIT
Accel Entertainment (ACEL)
Accel Entertainment (NYSE:ACEL) is a gaming stock, but this company doesn’t own any of the world-famous casino resorts in Las Vegas. In fact, it doesn’t even own smaller, less glamorous regional casino properties. Rather, this gaming firm is in what’s known as the “distributed gaming” industry. In other words, it owns/operates a network of gaming terminals located in non-casino locations such as bars, restaurants, and truck stops. A major player in the Nevada slot route industry, Accel also has a substantial presence in its home state of Illinois.
Recession worries have knocked ACEL stock to a rock-bottom valuation of just 12.8 times earnings. Yet not only could this stock move back to a higher valuation, once sentiment improves. Expanding into more markets, as more states legalize distributed gaming, the company’s long-term growth potential is likely greater than what the market currently expects.
Build-A-Bear Workshop (BBW)
With Build-A-Bear Workshop (NYSE:BBW) up more than 25% in the past six months, at first, it may seem questionable to call shares in this specialty retailer one of the overlooked small-cap stocks. But while some investors have caught onto this opportunity, plenty of runway may remain for BBW stock. BBW sells for only 7.2 times earnings. Shares are also still heavily shorted, as plenty are skeptical that the company’s profitability can continue in an economic downturn. Nevertheless, the company’s operating results have continued to beat expectations, and management’s guidance is upbeat.
For the coming fiscal year (ending January 2024), the sell-side anticipates another year of double-digit earnings growth. If Build-A-Bear pulls this off, the shorts could finally admit defeat. Although I wouldn’t buy BBW in the hopes of a short-squeeze, if the short side retreats, this stock could move 50% higher, and still be cheap relative to earnings.
City Office REIT (CIO)
As its name suggests, City Office REIT (NYSE:CIO) is a real estate investment trust (REIT) that owns office properties. While City Office may focus on one of the most challenging segments of commercial real estate, you may still want to go contrarian here and buy it.
Why? Although higher interest rates, plus the uncertainties surrounding office real estate (due to remote work trends), CIO stock is likely oversold. As a Seeking Alpha commentator argued back in January, even as the value of some of its more recently-acquired properties (all class A office buildings) have declined, shares sell at a considerable discount to the REIT’s underlying value. As InvestorPlace’s Josh Enomoto also recently pointed out, City Office REIT offers investors a fairly high dividend yield (8.58%). A possible “get paid while you wait” situation, a low valuation, and a high yield could result in outsized returns with CIO stock.
DHT Holdings (DHT)
Domiciled in Bermuda, DHT Holdings (NYSE:DHT) owns and operates crude oil tankers. Nearly doubling in price over the past year, I’ll admit that DHT really doesn’t seem like it’s one of the overlooked small-cap stocks. Yet even as shares have gone “to the moon,” given the “feast or famine” nature of the oil tanker industry, the market continues to price DHT stock at a discounted valuation, under the assumption that tanker rates, which have pulled back since surging late last year, will continue to move lower.
However, tanker rates may be starting to rebound. Factors like an increase in Chinese demand (due to the end of China’s Covid lockdowns) may help to support elevated tanker prices. This may in turn enable DHT to sustain recent earnings growth, allowing the company to maintain its 13.72% dividend. This high payout alone could enable shares to beat the market.
Levi Strauss & Co. (LEVI)
Last month, I called Levi Strauss & Co. (NYSE:LEVI) one of the best bargain stocks to buy. Citing strengths such as the iconic apparel maker’s impressive brand equity, I argued that it could return to a much higher valuation, once investors absorb the impact of the current global economic downturn.
LEVI stock is up only slightly since writing this, and this argument still holds. Forecasts call for LEVI’s earnings to rebound starting next year. Two years out, the company could be reporting annual earnings of $1.68 per share. Add to this potential for its earnings multiple to re-expand (it’s at 12.5 now, at 20 before last year’s sell-off), and it’s easy to see how LEVI could deliver returns outsized compared to the overall stock market. Major indices like the S&P 500 may not have the ability to double in two years, but this stock just might.
SP Plus (SP)
Rallying from the mid-$20s to around $40 per share in the past year, it’s clear investors to some extent have caught onto the opportunity with SP Plus (NASDAQ:SP). Even so, there may be more room for upside with SP stock. Shares in this parking facility management company (SP stands for Standard Parking) are easy to overlook, given the prosaic nature of its business. However, although the stock today trades at a fair multiple (16.8) compared to trailing twelve-month results, SP may be undervalued.
Between the parking lot industry’s post-Covid-recovery, and its acquisition of faster-growing businesses, earnings growth could re-accelerate starting in 2024. SP Plus’s transition into a “frictionless parking technology company” could also enable it to re-rate to a higher valuation over time, as the market continues to realize that parking facility management is no longer the low-margin, labor-intensive business it was in decades past.
Thryv Holdings (THRY)
Last fall, I argued that Thryv Holdings (NASDAQ:THRY) was one of the best unknown stocks to invest in before it hits the big time. Yet while I’ll admit that THRY hasn’t taken off since then, among overlooked small-cap stocks, it’s still one of the best, and here’s why. In recent years, Thryv has focused its efforts on using the cash flow from its declining phone book publishing business to fund the growth of its digital, SaaS-based business services platforms. As seen in its latest financials, this “new” segment of the company continues to grow at a double-digit clip.
With its transformation still in motion, Thryv may be on track to reach its goal of generating revenue of $1 billion, and adjusted EBITDA of $200 million, from its SaaS business alone within 5 years. Achieving this could have a substantial positive impact on the price of THRY stock.
On the date of publication, Thomas Niel held THRY. He did not hold (either directly or indirectly) any other positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.
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