Well, it’s been a long time coming, but we appear to have our correction. After a lengthy bull market, we have a sharp, distinct pull back that has brought things down from the clouds.
However, despite the doom and gloom coverage that seems to be flowing in from major media outlets that usually can’t muster much more market coverage than a daily check-in with the world’s worst stock index, there’s plenty of reason to believe that this won’t necessarily extend into a long-term bear market. After five years of massive gains, a pullback is probably a pretty normal, healthy occurrence.
That said, to quote the shrewdest of investors, Warren Buffett, investors should be “greedy when others are fearful.” In the event that this is just a correction, that would make the present an ideal opportunity to buy in and get the best price possible.
Push comes to shove, grabbing good stocks when they’ve been beaten down is a strategy that tends to work out in the long run.
Finding the Value Stocks Falling Through the Cracks
It should also be noted before any suggestion to buy recently falling stocks, there’s a real danger to value shopping. The phrase “catch a falling knife” is frequently used to caution against buying stocks just because they’re cheap. The harsh truth is that some stocks are bad at any price, and letting yourself get drawn in by a low one is an easy mistake to make. Or, to quote Mr. Buffett again, "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."
That said, a correction like the one we’ve just observed is bound to create opportunities. With the entire market headed downward lock-step, it stands to reason that at least some of the stocks losing ground are only doing so as part of the sell-off and not solely because of issues with the company. Which is, of course, not to say that there's no important issues these companies are grappling with. They wouldn't be seeing shares get beaten down if there was absolutely nothing. It's simply to suggest that the risk-off atmosphere is creating a sell-off that's far larger than those issues might warrant.
So, we’re going to take a look at four small-cap companies that are currently oversold based on their technical metrics, while also getting decent to good marks from analyst coverage. Whether they’re a wonderful company or not is up to you, but the fact is, they’ve gotten hit harder than most in recent weeks, and as markets start to bounce back, they should be well-positioned to benefit.
Fluidigm Corporation (FLDM)
Fluidigm Corporation is engaged in applied genomics and the creation of life science technologies that are oriented around the single cell. It has, to this point in 2015, taken a real beating (this is going to be a theme, by the way). Shares are off over 65% year to date.
Why? Well, the company’s had some serious issues monetizing its technology. Profit and operating margins are troubling, there’s a lot of debt, and the company has continued to show losses, including one that was wider than expected in early August that prompted the most recent big sell off.
However, there is a chance that the market has been harder on Fluidigm than would be warranted by the fundamentals alone. The current 14-day RSI is under 25 and the price dropped below its bottom Bollinger Band during that early August sell off.
And even beyond technical factors, Fluidigm has continued to grow revenue rapidly in recent years, and its current and quick ratio would seem to imply it has plenty of liquidity to react to market conditions. Throw in a gross margin in excess of 60%, and Fluidigm at least deserves a second look.
L.B. Foster (FSTR)
L.B Foster is an industrial goods company that operates largely in the rail, energy, and utility market. That makes it something of an odd play for the small-cap group. In a portion of the market that’s frequently populated by tech plays or new products, L.B. Foster has a decidedly throwback feel to it.
Throwback or not, though, the stock has been thrown down more than 65% so far this year. The company is hurting – particularly after having to part ways with Union Pacific (UNP) , one of its biggest customers, due to legal disputes over warranties. That said, there’s definitely an argument to be made that the correction for the company’s misfortunes is already more than priced in.
Across the board, L.B. Foster has price valuations that would indicate the stock is currently pretty cheap. P/E is just over 7, P/S is a microscopic 0.28, P/B is 0.51, and the P/FCF is 12.8. The current fall has put the company’s earnings at a very reasonable price. Throw in the dividend yield of 0.93%, and this is a stock that appears to have some real value.
On top of this, the stock’s recent beating has the 14-day RSI down to 21.86, meaning the current decline might just be a coiling spring. Hard to say, but this stock’s current price has to warrant at least some serious consideration.
Daktronics builds a variety of electronic display systems, including scoreboards, for markets in North America. The company’s 2015 has seen the stock decline over 30% with most of that coming in two big chunks following earnings reports in late February and then again this week.
Daktronics is crashing due to a big miss on revenue in its most recent report, and the company continues to struggle to improve margins in a competitive market.
However, despite dark times, there’s reason to believe this stock could be ready to bounce back. Revenue may have missed recently, but it has posted gains steadily for years. Projections for earnings next year are strong, with a PEG of 0.89, Forward P/E of 11.25, and a P/S ratio of 0.60. The technical data also indicates a stock ready to run, with a 14-day RSI of 26.45 and a price that spent most of August beneath its bottom Bollinger Band.
State National Companies (SNC)
Anyone who bought into the IPO for property and casualty insurance provider State National Companies in November of last year, ironically, is probably wishing they had insured their investment right about now. Since its debut, the stock has lost about a quarter of its value.
However, despite the company’s issues, there’s plenty to like about State National. Firstly, it remains profitable – and has been for years. Not something you can say about many small caps within the first year of their public debut. It also grew revenue in 2013 and 2014, including by more than 20% last year, and it features a dividend yield over 2.5%, meaning even sluggish gains for the stock can be mitigated somewhat.
The company’s earnings, meanwhile, are looking stronger in comparison to its price. The stock’s P/E ratio is a little over 12.5, and its forward P/E and P/FCF are both just over 7.5. There’s also that operating margin over 30%.
And, finally, like the other companies on the list, the recent selloff has the stock looking oversold. With a 14-day RSI just under 25, and an entire month of trading just over or just under its bottom Bollinger Band. State National Companies has the look of being a decent income stock and a solid value buy at its current price. If the company keeps generating profits and growing revenue, it could wind up generating some real returns for anyone jumping on its current down trend.
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