- Celestica (CLS): This technology company has a high expected EPS growth of nearly 15%.
- The GEO Group (GEO): The real estate investment trust has consistent positive free cash flow.
- Bassett Furniture Industries (BSET): The home furnishings retailer has an attractive dividend yield of almost 3.3%.
2022 has been a year of turmoil for the U.S. stock market with unanticipated geopolitical risks, higher interest rates and a shift in the investment preference from growth to value. This trend is likely to persist throughout the whole year. So, why invest in undervalued small-cap stocks? There are a couple of reasons.
First, the Russell 2000 Index that tracks 2,000 small-cap companies has underperformed in 2022 with losses of 11.17% as of Apr. 8. Additionally, the S&P 500 index has a loss of nearly 6% in 2022, so looking for bargains in small-cap stocks now seems like a valid thing to do.
Second, a way to diversify a portfolio made of stocks can be based on market capitalization and not just on sectors and industries. Third, small-cap stocks are riskier than large-cap stocks, but this extra riskiness can compensate by delivering a better risk-adjusted return. Two of the following three small-cap stocks have a Beta that is higher than 1.0, which supports the expectation of outperforming the broader stock market, while also providing a considerable safety margin from being undervalued, making them ideal for long-term passive investing and active trading.
I used the Zacks stock screener to find stocks with a price-to-earnings-growth (PEG) ratio of less than one, a price-to-book (P/B) value ratio of less than one and a price-to-sales (P/S) ratio of less than one. Meeting these three criteria supports the idea of these stocks being undervalued.
Here are my picks for the three best undervalued small-cap stocks:
|GEO||The GEO Group, Inc.||$6.75|
|BSET||Bassett Furniture Industries||$17.28|
Undervalued Small-Cap Stocks: Celestica (CLS)
Celestica (NYSE:CLS) provides supply chain solutions to original equipment manufacturers and service providers on a global basis. It operates in two main segments: Advanced Technology Solutions and Connectivity and Cloud Solutions. It has an expected 3–5-year earnings per share (EPS) growth of nearly 15%, which is considered very positive.
The price-to-earnings (PE) Ratio (TTM) of 13.6 is low. And even though declining sales growth is a concern, profitability is strong and consistent. In 2021, net income increased 60.26% to $130.26 million.
Year-to-date, CLS stock is almost flat in a very tough year for the stock market, but the company shows resilience when it comes to its EBITDA. In 2021, EBITDA increased 13.24%. Throughout the period between 2017 and 2021, it has been consistently positive and above $300 million. Diluted EPS increased 63.29% in 2021 to $1.03. Celestica is an undervalued stock with strong EPS growth. This is a combination that could deliver strong returns.
The GEO Group (GEO)
This is important as GEO stock is a defensive stock that is expected to be less volatile than the stock market as a whole. It is time to build defensive portfolios to protect against geopolitical risks, higher inflation and rising interest rates.
The GEO Group is a company that owns, leases and manages secure facilities, processing centers and reentry centers in the U.S. They also work in other countries like Australia, the United Kingdom and South Africa. Its expected EPS growth for the next 3-5 years is 10%, which is attractive.
Over the past four consecutive years, the company has decreased its capital expenditures and therefore has strong and positive free cash flows that are volatile. Profitability is strong and positive and the PE Ratio (TTM) of 10.45 is very low.
Undervalued Small-Cap Stocks: Bassett Furniture Industries (BSET)
Bassett Furniture Industries (NASDAQ:BSET) manufactures and markets home furnishings in the U.S. and internationally. There are three interesting facts about BSET stock to be aware of. First, the company turned profitable in 2021, as it was profitable in 2017 and 2018, but it reported net losses in 2019 and 2020. The company reported a net income of $18.04 million in 2021, an increase of 273.13%, which is very substantial. Often, the transition from a net loss to profitability reflects an inflection point in the business model.
Second, Bassett Furniture Industries has a forward dividend and yield of $0.56, or 3.27%, which can add to the total return if BSET stock rises from its current price. Sales growth in 2021 was 26.09% and free cash flow has been positive in 2020 and 2021, another positive signal for valuation purposes.
The expected EPS growth for the next 3-5 years is 16%, which is solid.
On the date of publication, Stavros Georgiadis, CFA did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.