Small-capitalization stocks have outperformed large-cap stocks this year, with the Russell 2000 index of small-caps soaring 11.3%, compared with an 8% rally for the S&P 500 index.
But small-caps are still the most undervalued sector of the market by capitalization, says Dave Sekera, Morningstar’s chief U.S. market strategist.
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“Small caps are trading at about a 20% discount to our fair values, compared to the broader market, which is only an 8% to 9% discount.”
Sekera cited four undervalued small-cap stocks for investors to consider.
Malibu Boats (MBUU), a power-boat maker.
Morningstar assigns the company a narrow moat (competitive advantage) and puts fair value for the stock at $96, 50% above recent trading around $63.
“Boats sold very well during the pandemic,” Sekera said. “Now, looking forward, we expect that Malibu will be able to maintain these elevated sales through a combination of market-share gains and entering new markets.”
Profit margins are under pressure from inflation. “But I suspect that the company has plans in place to bring their margins back,” he said.
Macerich (MAC), a shopping-mall REIT.
Morningstar gives the company no moat and puts fair value for the stock at $27.50. That's more than twice recent trades at $13.
Macerich has a “healthy” dividend of 5.12%, Sekera notes. And “we think the prognostication of death for the shopping mall is greatly exaggerated at this point,” he said.
“Those that do have lower quality malls … are struggling. But with Macerich, we think their portfolio is very high-quality. And we have been seeing increases in foot traffic for Class A malls, as the pandemic recedes.”
Ingredion (INGR), which makes ingredients for the food and beverage industries.
Morningstar assigns the company a narrow moat and puts fair value for the stock at $120. It recently traded at $99, 21% below fair value.
“Even in this inflationary environment, Ingredion has very strong pricing power, and I think that speaks well to the economic value of its products,” Sekera said. So, it has been able to push through cost increases.
“Looking forward, we forecast the company will increase its sales mix into additional higher-margin specialty products,” boosting growth, he said.
Guardant Health (GH), a provider of cancer blood tests.
Morningstar gives the company no moat and puts fair value for the stock at $63. It recently traded at $29.50, less than half fair value.
“That’s one of our better picks in the medtech space,” Sekera said. While Guardant earns no moat, “it has a positive moat trend,” he pointed out.
Liquid biopsies, a type of cancer blood test Guardant provides, are “one of the largest market opportunities across the entire health-care sector,” Sekera said.
To be sure, Guardant is a “higher-risk” stock, but he anticipates Food and Drug Administration approvals for its liquid biopsy tests.
