For Small cap enthusiast, after a first-half of euphoric markets, the second half of the year seemed like there was no escape from the carnage. YTD, as of Tuesday, (11/06) the Russell 2000 was up 1.34% compared to the S&P 500 up 3.06%. Small cap investors must felt that the last four weeks were among the highest pain points of the year.
For months, the markets and small cap stocks have been caught up in a hail of uncertainty. Investor sentiment reacted sharply to the prospect of the Fed raising rates, U.S. trade wars, 3rd quarter earnings results, mid-term elections, and sophisticated programmatic computer trading algorithms sending out sell orders on market volatility. Notably for small cap stocks, the pain point is often greater as many of these stocks suffer at the slightest hint of higher interest rates. Small cap stocks tend to have more debt and leverage the than large cap stocks – companies with these characteristics typically do not react well to the prospect of raising rates. Many market pundits and professional investors have voiced concerns that the catalysts creating negative sentiment are setting up 2019 for slower economic growth. At this point of the market cycle, the good news could be that a lot of the negative sentiment is already discounted into stocks and the harsh environment for small cap stocks may be beginning to improve.
In fact, if you review the headlines, many leading experts are claiming the sell-off is complete or close to complete. With the election uncertainty behind the markets, strong 3rd quarter earnings announcements supporting the case for future share buybacks, and investors getting comfortable with discounting Fed speak it is very possible small cap stocks could see a nice rally into the end of the year and over the next 12 weeks.
According to LPL Financial’s Ryan Detrick, as interviewed on CNBC, he found going back to World War II that in mid-term election years the S&P was higher from the October low close “Eighteen out of 18 times and up just over 10 percent on average.” There are number of other studies that also exhibit the S&P 500 climbs consistently for the 12-week period following the mid-term elections. Notably, the post mid-term rally even occurs when the incumbent President’s party loses seats in Congress.
In the small cap arena, we would look to add stocks that counter market fears with strong upward earnings revisions from Wall Street analysts. At CressCap, we would like to feature three stocks from three different sectors. Luxfer as industrial recommendation, Boot Barn from the consumer discretionary sector, and Ceragon Networks as our small cap technology recommendation.
The foundation of our recommendations is to identify companies that perform best and worst on the collective basis of value, growth, EPS revisions, profitability, and LT momentum. The CressCap systematic trading model gathers data daily on 6,500 companies globally and assigns academic grades (A – F) for each financial metric. These grades are scored relative to its region/sector.
Luxfer is a leading producer of highly engineered advanced materials serving end markets worldwide. Luxfer’s five core businesses are Gas Cylinders, Graphic Arts, Magtech, Luxfer MEL Technologies and Luxfer Superform.
Luxfer, one of our top ranked stocks in the industrial sector, ranks number 3 out of 508 stocks we rate in the industrial sector. The company has an overall CressCap A+ rating and holds an equivalent grade for both EPS Revisions and Momentum. The company just reported Q3 and beat on expectations for both EPS and Revenue. EPS Revisions are increasing favorable as in the last 90 days analysts increased estimates by 27% and 20% for FY ’18 and FY ’19 respectively.
Luxfer’s Chief Executive Officer Alok stated, “Double-digit organic growth, strong productivity and benefits from our simplification initiatives delivered financial performance above expectations.”
Boot Barn Holdings, Inc. (BOOT-US)
A favorite at any market cap level, and highlighted by CressCap again this year, Boot Barn is a leading lifestyle retailer of western and work-related footwear, apparel and accessories for men, women and children. The company is currently the largest and fastest-growing lifestyle retail chain devoted to western and work-related footwear, apparel and accessories in the U.S. The company sells multiple celebrated brands such as Ariat, Wolverine and Wrangler. Boot Barn holdings just announces second quarter fiscal year 2019 financial results and exhibited a net sales increase of 17.5% and same store sales increase of 11.3%.
Boot Barn ranks number 2 out of 314 stocks in the CressCap consumer discretionary sector. The company released its financial results for the second quarter fiscal year 2019, October 25, 2018, and beat both EPS and Revenue estimates. Revenue was up 17.5% Y/Y. Wall Street analysts have been very positive on earnings and over the last 90 days have revised estimates up by 20% for the current FY.
We label this stock a buy in the consumer discretionary sector accompanied by an A grade. The stock proves to have impressive financial metrics, with it receiving A- and A grades in CressCap growth, and EPS revisions respectively. The PEG ratio at 0.87x compared to the sector 1.29x is given a CressCap grade of B+, showing that the value metric shows promise.
Ceragon Networks (CRNT-US)
Ceragon Networks Ltd. provides high-capacity microwave Ethernet and TDM wireless backhaul to wireless service providers as well as private businesses. They are the #1 wireless backhaul specialist. CRNT ranks number 31 out of 392 stocks in the CressCap IT sector. On Monday (Nov 5), Ceragon’s Q3 results beat EPS and revenue estimates. The company reported revenues of $86.5 million, up 13.9% year-over-year. The company gets an A+ grade for both the EPS analysts revision grade and the 2 Yr. Historic Sales Growth Rate grade. We also find value within EV/EBITDA with a CressCap A grade, as well as, the PEG ratio grade of B+. The underlying PEG ratio exhibits a multiple of 1.08x compared to the sector at 1.41x.
Ira Palti, president and CEO of Ceragon stated, “We are achieving our goal of growing net income and delivering strong cash flow, even as we continue to invest aggressively in our next generation 5G solutions.” Ceragon’s focus on wireless backhaul solutions are gaining tractions in North America as they build out a foundation for upcoming 5G service rollouts.
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