Small cap investing has taken a big hit over the past year as the Federal Reserve has raised rates faster and farther, on a percentage basis, than anytime in history. But there are signs the rate cycle is topping, which could be a huge boon for small cap stocks. But with landmines, many in the form of debt that must be refinanced, littering the landscape, many investors may turn to Westwood Holdings (WHG).
With over $15.5 billion under management, Westwood is an investment management and servicing company, with a focus on retirement advisory services and trust. Westwood has unique capabilities in small cap value stocks and real estate.
At this point in the economic cycle, Westwood has been touting its ability to identify quality small caps, that have much less debt/leverage than the typical Russell 2000 company, and that should be able to survive an economic slowdown. The firm is very focused on the fact that not all small caps are created equal.
The company recently reported increasing revenue and income in its latest earnings release that boosted the stock by 20%. Brian Casey, Westwood’s President and CEO, commenting on the possible topping of interest rates, stated, “We are beginning to detect green shoots on the distribution front and we’re looking forward to showcasing our solid investment performance to the marketplace as investors and advisors begin to envisage an environment in which cash is no longer the only game in town.”
Westwood acquired Salient Partners in 2022, which had a large book of energy investments. Casey praised the integration efforts over the past few quarters, and said the combined company has “launched Westwood Energy Secondaries Fund to access private investments in the energy field.”
Despite the recent jump in Westwood’s stock price, from a base it has been forming since late 2022, the shares are trading at an attractive valuation. They trade at just 0.85x book value and 11.1x free cash flow. The company currently has a PE of around 18.5.
As Westwood is quick to point out, debt is not a great thing in this interest rate environment, and the company itself has little to no debt. And with Salient integration complete, as mentioned above, the company saw a massive quarter over quarter increase in both sales and earnings. The company currently pays a dividend of just over 5.5%.
Westwood is an A rated stock in our POWR Ratings, with outstanding scores in four separate components, Momentum, Sentiment, Quality, and Growth, where it outranks over 93% of the stocks in our database.
With a possible turn in the small cap market next year if rates have topped, Westwood is in a great position to capitalize on its investment knowledge and capture additional assets. And the 5.5% yield is a nice incentive to be in this investment manager early in the cycle.
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WHG shares were unchanged in after-hours trading Tuesday. Year-to-date, WHG has gained 3.65%, versus a 18.64% rise in the benchmark S&P 500 index during the same period.
About the Author: Jay Soloff
Jay is a former professional market maker who cut his teeth trading on the floor of the CBOE. With more than 20 years of experience trading and investing, his focus is on making professional strategies accessible to everyone, which is exactly what does in his highly profitable POWR Income and POWR Stocks Under $10 investment advisory services.
POWR Income Stock of the Week: Westwood Holdings (WHG) StockNews.com
