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All Contents © 2020The Kiplinger Washington Editors
By Dan Burrows, Contributing Writer
| May 16, 2019
Investors who can stomach more risk stand to reap greater rewards. That’s where small-cap growth stocks come in, and they just might deserve a place in your buy-and-hold portfolio.
Research shows that growth stocks with small market capitalizations – market values between roughly $300 million and $3 billion – tend to outperform larger asset classes over time. Indeed, the so-called small firm effect was documented by Eugene Fama, a winner of the 2013 Nobel Prize in Economics.
“Because they usually are young and lack exposure, small-cap growth companies tend to fly under the radar,” writes financial services company Federated Investors. “They are less closely followed and understood by the community of securities analysts, which sometimes means they sell for less than their true or potential value, creating opportunities if the market comes to re-price their shares accordingly.”
To get a sense of which small-cap growth stocks look ripe for the picking these days, we screened the small-cap benchmark S&P SmallCap 600 Growth Index for stocks with the highest average analyst ratings. We limited ourselves to companies with market caps of at least $1 billion. Furthermore, our stocks had to have a minimum of five “Strong Buy” analyst recommendations.
S&P Global Market Intelligence surveys analysts’ ratings on stocks and scores them on a five-point scale, where 1.0 equals a “Strong Buy” and 5.0 means a “Strong Sell.” Any score lower than 3.0 means that analysts, on average, rate the stock as being buy-worthy. The closer the score gets to 1.0, the better.
Based on those criteria, here’s a look at the 10 best-rated small-cap growth stocks in the S&P SmallCap 600 Growth Index.
Data is as of May 15. Analysts’ ratings, provided by S&P Global Market Intelligence, are as of May 7. Dividend yields are calculated by annualizing the most recent quarterly payout and dividing by the share price. Companies are listed by strength of analysts’ recommendations, where the last company holds the best rating.
Armada Hoffler Properties
Market value: $1.1 billion
Dividend yield: 5.1%
Analysts’ average recommendation: 1.57
Armada Hoffler Properties (AHH, $16.49) doesn’t fit the stereotype of small-cap growth stocks, where investors imagine red-hot tech plays or biotechnology companies on the cutting edge of new cures. Instead, Armada is a diversified real estate investment trust (REIT) that owns a mix of office buildings, retail locations and apartment buildings, mostly in the Greater Baltimore/Washington, D.C. area.
REITs offer an easy way for investors to bet on real estate and collect a generous stream of income at the same time. By law, a REIT must pay out at least 90% of its taxable income in the form of dividends. As such, REITs offer comparatively high – albeit sometimes more volatile – yields.
Shares in AHH are up more than 17% year-to-date (vs. a gain of 14.4% for the Standard & Poor’s 500-stock index), helped by continued growth in its real estate portfolio. The company recently announced it would acquire the Red Mill Commons and Marketplace at Hilltop retail centers in Virginia Beach, where the REIT is headquartered.
Analysts at Janney, who rate shares at “Buy,” note that AHH’s core portfolio’s occupancy rate grew both sequentially and year-over-year in the first quarter, and now stands at 96%.
Of the seven analysts covering Armada Hoffler Properties tracked by S&P Global Market Intelligence, five give the stock their strongest “Buy” rating, while two have it at “Hold.”
Market value: $3.1 billion
Dividend yield: N/A
Analysts’ average recommendation: 1.45
Shares in Viavi Solutions (VIAV, $13.38) have returned 33% year-to-date, and analysts – who have a consensus 12-month price target of $15 – think the stock has more room to run.
Viavi specializes in testing and monitoring various types of communications networks, such as broadband, copper, Wi-Fi and fiber optic, and analysts are bullish on its growth prospects.
Viavi is projected to deliver average annual earnings growth of 16% over the next three to five years, according to data from S&P Global Market Intelligence. Of the 11 analysts covering VIAV, eight give it their strongest “Buy” rating, one has a more moderate buy-worthy rating and two say it’s a “Hold.”
The emergence of next-generation, or 5G, cellular networks is a key part of analysts’ collective faith in this firm.
“We continue to believe the company’s wireless test business is in the early stages of a multi-year investment cycle as original equipment manufacturers and service providers begin their transition to 5G networks,” write Stifel analysts, who rate VIAV a “Buy.”
Market value: $2.7 billion
Analysts’ average recommendation: 1.38
It’s been a volatile past year for investors in HMS Holdings (HMSY, $31.38) but analysts believe the small-cap growth stock is in store to look more like Dr. Jekyll and less like Mr. Hyde.
Shares in the benefits coordinator and billing auditor for government and commercial health care programs are up 51% over the past 52 weeks versus a gain of 5.5% for the S&P 500 over the same span. But they haven’t done so in linear fashion. Indeed, HMSY’s 52-week range stretches from $20.73 to $38.15.
Analysts’ average price target of $38.58 gives HMSY implied upside of about 23% from current levels. Farther out, analysts expect HMS to generate average annual earnings growth of 14% for the next three to five years. Of the 13 analysts surveyed by S&P Global Market Intelligence, nine rate HMSY at “Strong Buy,” three call it a “Buy” and one has it at “Hold.”
“We continue to view the growth outlook as robust, driven by strong commercial sales, novel product launches, and solid execution on myriad corporate initiatives,” say analysts at William Blair, who rate shares at “Outperform,” their top buy-worthy rating.
Market value: $2.0 billion
Dividend yield: 1.1%
Analysts’ average recommendation: 1.36
Dave & Buster’s Entertainment (PLAY, $55.60), the restaurant and arcade chain, has analysts excited about a turnaround in its foods and beverage business.
The company’s amusements division, which includes arcade games, billiards and bowling, saw strong sales in the most recent quarter, note analysts at Maxim, which rates shares at “Buy.” But it was the restaurant’s results that really stood out. The food and beverage business posted an increase in same-store sales – a key retail industry metric – “for the first time in two years,” Maxim says.
PLAY stock is up nearly 25% year-to-date, more than doubling the performance of the broader market over the same time frame. Analysts think there’s more where that came from. Their average target price of $63.60 gives Dave & Buster’s implied upside of about 14% in the next 12 months or so.
Longer-term, Wall Street’s pros expect the company to deliver average annual earnings growth of 15% over the next three to five years, according to S&P Global Market Intelligence. Of the 11 analysts covering PLAY tracked by S&P GMI, seven rate shares at “Strong Buy” and four have it at “Buy.”
Market value: $2.8 billion
Analysts’ average recommendation: 1.33
Brooks Automation (BRKS, $38.27) makes specialized, high-tech equipment for companies in the semiconductor, solar and chemical industries, among others. Continued strength in the semiconductor segment and Brooks’ emergence as a player in life sciences makes analysts bullish on the name.
Analysts as Stifel, who give BRKS shares their top “Buy” rating, say their recommendation is based in part on a “more favorable outlook” for Brooks’ emerging life sciences business, continued outperformance in its semiconductor business, and improved cash flow generation.
Brooks has gained 46% year-to-date, but only one pro thinks shares are fully valued at the moment. Of the six analysts covering the stock tracked by S&P Global Market Intelligence, five rate BRKS at “Strong Buy.” The lone dissenter has it at “Hold.”
CryoLife (CRY, $30.02) participates in the niche business of distributing cryogenically preserved human tissues for transplant purposes, and also has a medical-devices division.
Shares haven’t wowed investors so far in 2019, with meager 6% returns that are easily underperforming the market. But analysts think that’s about to change.
Canaccord Genuity, which gives CRY its top “Buy” rating, thinks the second half of the year will be a “transformative” period for the company – one in which its product pipeline leads to accelerating sales growth, fatter profit margins and increasing profitability over the next two to three years.
Five analysts surveyed by S&P Global Market Intelligence rate CRY at “Strong Buy,” while one calls it a “Hold.” Their average target price of $36.10 gives CRY implied upside of about 20% over the next 12 months or so. And analysts project CryoLife to generate average annual earnings growth of 30% over the next five years, according to data from Refinitiv.
Market value: $1.6 billion
Analysts’ average recommendation: 1.29
Shares in Virtusa (VRTU, $54.20) were up 27% year-to-date through May 15, but the stock was primed to sink into the red May 16 following an extremely disappointing quarterly earnings report.
But while three analysts did lower their price targets on VRTU in response, they also maintained their bullish ratings on the information technology services company.
Virtusa, which provides IT consulting and outsourcing services, missed analysts’ profit expectations by more than 25% and issued full-year guidance that came in below Wall Street’s estimates. It maintained the five “Strong Buy” and two “Buy” ratings from analysts surveyed by S&P Global Market Intelligence that it boasted earlier in the week, and analysts still expect the company to generate average annual earnings growth of 21% over the next three to five years.
But their average price target on VRTU shares, which was $64.83 on May 13, dropped to $58 shortly after its earnings report. But that translates to still-high upside potential once the smoke clears.
For instance, Cantor Fitzgerald’s Joseph Foresi, who rates shares at “Overweight” (the firm’s top “Buy” rating), lowered his price target from $56 per share to $52, but he cites the company’s improved organic growth rates (organic growth excludes contributions from acquisitions) and margin expansion as reasons why he’s still bullish VRTU.
Market value: $2.6 billion
Dividend yield: 3.4%
Analysts’ average recommendation: 1.25
Agree Realty (ADC, $67.71) is another REIT that finds itself among small-cap growth stocks. Agree is a commercial REIT that owns more than 700 properties that it leases to retailers across 46 states. It got off to a strong start in 2019, say analysts at Janney, who give ADC their top “Buy” rating and say the stock is “one of our favorite REIT names.”
That bullishness stems in part from the company’s occupancy rate, which stood at 99.7% at the end of the first quarter. Agree Realty’s tenants are a sort of who’s who of blue-chip companies. The REIT leases space to Sherwin-Williams (SHW), Walmart (WMT) and Walgreens (WBA), among other national brands. Better still, Agree Realty is a “net lease” (or “triple-net”) REIT – a model where tenants are responsible for property taxes, insurance and maintenance costs, resulting in more consistent and predictable earnings for the REIT.
The dividend, while not great for a REIT, still is roughly twice the S&P 500 average. And the stock’s low volatility – it moves far less drastically than the S&P 500 in both up markets and down – allows investors to sleep at night.
Seven analysts tracked by S&P Global Market Intelligence rate ADC at “Strong Buy,” and one says it’s a “Hold.”
Market value: $1.7 billion
Supernus Pharmaceuticals (SUPN, $33.34), a specialty pharma company that focuses on treatments for central nervous system diseases, is treading water in 2019. Shares are almost breakeven year-to-date thanks to a May selloff triggered by weak first-quarter numbers. However, analysts remain bullish because of Supernus’s success with a couple of key approved drugs, as well as a few treatments under development.
Total prescriptions for Trokendi XR, a migraine-prevention medicine, and Oxtellar XR, an anticonvulsant, rose 11% year-over-year in the first quarter, note analysts at Janney, which has SUPN at “Buy.”
“Over the long-term, we anticipate Oxtellar will continue to grow and benefit from expansion as a monotherapy for the treatment of partial seizures,” Janney’s analysts write. “Further upside will come from potential expansion for bipolar disorder.”
SUPN also is targeting treatments for attention-deficit/hyperactivity disorder (ADHD).
Seven analysts surveyed by S&P Global Market Intelligence give SUPN their strongest buy-worthy ratings. One analyst calls it a “Hold.” Their average price target of $57.88 gives SUPN implied upside of 74% in the next 12 months or so.
Market value: $2.2 billion
Analysts’ average recommendation: 1.22
Shares in NeoGenomics (NEO, $23.11) are scorching Wall Street with 83% gains in 2019, and analysts continue be bullish on the stock – at least for now.
With the stock bumping up against their average price target of $24.13, they’ll either have to hike those targets or downgrade the stock to “Hold” on valuation concerns.
Until then, however, the operator of a network of cancer-focused genetic testing laboratories is tops among small-cap growth stocks with a market cap above $1 billion and at least five “Strong Buys,” according to S&P Global Market Intelligence. Needham analysts, who give shares their top “Buy” rating, cite the firm’s plan to double its sales force to 70 representatives as just one reason to like the stock.
Seven analysts rate shares at “Strong Buy” and two call it a “Buy,” according to S&P Global Market Intelligence. They expect NeoGenomics to generate average annual earnings growth of 20% over the next three to five years.