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By Will Ashworth
| August 16, 2017
Small-cap stocks took it on the chin last week as North Korean tensions had investors running as fast as they could from anything that wasn’t the bluest of blue chips.
The Russell 2000 Index lost 2.7% in the five days of trading between Aug. 7 and Aug. 11, its worst week since February 2016. Now up just 3% year to date compared to 10% for the S&P 500, the flight to quality is threatening to leave small caps on the outside looking in.
Investors who love dividend stocks rarely buy small-cap stocks because they’re interested in consistent dividend growth, something smaller companies often can’t provide.
In the ninth year of a bull market, the price-to-earnings ratio of the S&P 600 SmallCap Index, like most indexes, has risen dramatically since 2011.
That said, it doesn’t mean there aren’t small caps worth owning that pay a sizable dividend and are still growing.
Here are my three best ideas of small-cap stocks worth owning.
Prices and data are from the original InvestorPlace story published on August 14, 2017. Click on ticker-symbol links in each slide for current prices and more.
Dividend Yield: 10.8%
The five-year chart of New York-based investment bank Greenhill & Co., Inc. (GHL) looks identical to an Olympic ski jump.
Starting around $60 in early 2013, Greenhill’s stocks went on a steady decline down to $16 in July 2016. After that, it proceeded to make a bit of recovery late that year, rising to $30 before falling back to the mid-teens in 2017.
Greenhill’s stock price has been declining in 2017 due to lower revenues and profits. The investment bank does a lot of business internationally, especially in the UK; Brexit has had a significant effect on its top and bottom line.
However, in its second-quarter results, it still managed to generate 20 cents in earnings per share despite a 26% decline in year over year revenue. Also, the company has added nine managing directors so far in 2017, providing investors with a sense of optimism heading into the second half of the year.
With a valuation that’s historically low, GHL stock gives investors a great opportunity for both income and capital gains.
Dividend Yield: 7.5%
A lot of people steer clear of business development companies like Solar Capital (SLRC) because they feel the high dividend yield isn’t worth the extra risk.
I believe BDCs, like any investment, should be evaluated on some different criteria, including the strength of the management team. Both its CEO and COO have been with the company since the company’s founding in 2007.
On Aug. 1 it announced it had acquired Nations Equipment Finance, an independent equipment finance business in the U.S., for $210 million. The move provides Solar Capital with another credit platform upon which to grow its business.
NEF’s management is made up of former GE Capital equipment finance professionals who know what they’re doing, have a strong track record and will hit the ground running.
Long-term, SLRC’s stock has performed decently since its February 2010 IPO. I’d be buying its stock for the income more than any capital appreciation one might expect over the next three to five years.
Dividend Yield: 4.5%
You can call me crazy for picking American Eagle Outfitters (AEO) given the retail apocalypse we’re in, but I believe that the upside for AEO stock is far greater than the downside at this point; the 4.5% dividend yield is definitely worth the risk while the company works its way through the downturn in the industry.
American Eagle reports second-quarter results on Aug. 16. Analysts expect revenues of $824 million, approximately flat to a year ago, with earnings per share of 16 cents, seven cents or 30.4% lower than in Q2 2016.
Business is probably going to get worse before it gets better, so I wouldn’t look for its stock price to go higher anytime soon. However, it’s doing a good job growing its e-commerce business, which accounted for 26% of its overall revenue in Q1 2017, considerably higher than the 20% figure in 2016 when I suggested AEO stock would shine again soon.
Since then, its stock’s lost about 37% of its value, as much an indication of the overall downturn in retail as it is a reflection of the company’s specific weaknesses with regards to its American Eagle brand.
It’s not often I recommend you should double down on a losing investment, but AEO stock is worth exploring at these prices. Just don’t make it more than 2%-3% of your overall portfolio.
This article is from Will Ashworth of InvestorPlace. As of this writing, he held none of the aforementioned securities.
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