"Get ready for the small-cap bull run," says BofA.  Here are 2 small "strong buy" stocks to consider

Tired of the Nonstop Bear Market in 2022? Well, good news. According to Bank of America, the stage is set for 2023. But more intriguingly, given the current conditions, the market leaders are not invited to this party, and those further down the food chain are set to lead the way.

Or as BofA chief investment strategist Michael Hartnett puts it, “Global trends of stagflation, reloading, localization, fiscal stimulus = small-cap bull in 2023.”

Hartnett has history on his side. Similar to the market’s behavior during the hyperinflation era of the 1970s, after nearly two decades of dominance, the Nasdaq 100’s dominance is beginning to wane significantly, and Hartnett expects a repeat of past events. “Stagflation continued into the late 1970s, but after the inflationary shock of 1973/1974 wore off, US small caps entered one of the great bull markets of all time,” added Hartnett.

With that in mind, we delved into TipRanks database and upgraded two small-cap stocks that the analyst consensus rated as strong buys. It also doesn’t hurt that both offer investors double-digit upside potential and a small dividend as a bonus. This makes them ideal candidates for advancement if BofA’s thesis comes to fruition.

H&E equipment services (HAYES)

There are many jobs that require equipment only temporarily, especially for large-scale industrial work; this is where H&E Equipment Services comes into the frame.

H&E is one of the largest equipment rental companies in the US and makes the majority of its revenue from the rental of a variety of construction and industrial equipment such as earthmoving tools, aerial work platforms, industrial carts, air compressors and equipment for material handling, among others. The company also offers a range of different services such as sales of new and used equipment and repair and maintenance.

By the end of 2021, the company had 102 branches located in 24 states. Just to give you an idea of ​​size, H&E’s portfolio boasts 42,725 pieces of equipment that have an average age of less than 3.5 years.

After a somewhat uneven period, revenue has steadily increased in 2022, and this was evident in the third quarter as well. The top line showed $324.3 million, representing a ~18% year-over-year increase, while beating the Street estimate by $20.34 million. Gross margin rose to ~47% from 41.4% seen in 3Q21, while net income saw a ~55% increase to $38.4 million. That led to earnings per share of $1.05, much higher than the $0.82 analysts had forecast.

Thanks to solid earnings growth, the company was able to easily maintain its common stock dividend of $0.275 per quarter. The payout has been held at this level since May 2015. At its current rate, the payout is annualized to $1.10 per common share and yields 2.7%.

Stifel Analyst Stanley Elliott believes H&E is a favorite story for investors and outlines why: “HEES continues to execute on its warm-start strategy and still expects at least 10 openings in 2022. We view the accelerated growth potential from a warm start as a relatively unique attribute relative to peers, which have less track. We remain positive on the stock given this warm start strategy as well as the favorable footprint. We also see improving non-residential construction activity, the recovery in Florida, and the benefits of infrastructure bills as tailwinds heading into 2023. Despite these attractive growth drivers for the company, the stock trades at a significant discount to peers while carrying ~3 % dividend yield.’

These bullish comments underlie Elliott’s Buy rating on HEES, while his $60 price target suggests the stock will rise 47% in the coming months. (To watch Elliott’s record, Press here)

Looking at the consensus breakdown, other analysts are on the same page. With 4 buys and no holds or sells, the word on the street is that HEES is a strong buy. H&E shares are valued at $40.73 and their $52 average target suggests a ~28% gain over the next 12 months. As for small-cap credentials, H&E’s market cap is just under $1.5 billion. (See the H&E stock forecast at TipRanks)

Patrick Industries (PATK)

The next small-cap stock we’ll look at is Patrick Industries, a leader in component products and building materials. They are manufactured and sold by the company and target several industries such as Recreational Vehicles (RV), Manufactured Homes (MH), Marine and many other industry segments. Offerings include everything from countertops, flooring and bathroom/kitchen fixtures and laminates to furniture, electronics and audio systems, appliances and more.

Through its national manufacturing and distribution network, the company generated sales of +$4 billion last year from its 70+ subsidiaries, of which over 75% came from the RV/marine industry.

The company is on track to beat that figure this year despite a tough macro backdrop. In its latest quarterly report for the third quarter, the company generated revenue of $1.11 billion, an increase of 4.7% year-over-year. While that represented a sequential decline from the $1.48 billion generated in Q2, the figure beat Street expectations by $20 million. The company also has a habit of beating EPS estimates, and it was no different in Q3. Analysts were calling for EPS of $2.03, but Patrick delivered $2.43.

The company also declared a third-quarter dividend in August of $0.33 per common share. This payment gives an annual common stock dividend of $1.32, which in turn makes the yield 2.75%.

Among the bulls is Truist’s 5-star analyst Michael Swartzwho believes the market “has yet to fully appreciate the structural improvements PATK has made to its margin profile over the last 3-4 years.”

“That being the case,” the 5-star analyst explained, “despite a deteriorating production outlook in all of PATK’s key end markets since the last report (July), the company actually raised its full-year margin expectations. While we expect some year-on-year gross margin pressure to continue in 1H23, we increasingly believe the company can maintain 20% gross and 10%+ EBITDA margins even in a deteriorating macro environment.”

So what does all this mean for investors? The analyst rates PATK shares a buy, supported by a $60 price target. If the figure is achieved, investors will reap profits of 25% a year from now. (To watch Swartz’s record, Press here)

Similarly, other Wall Street analysts were impressed with PATK. It earns a consensus rating of Strong Buy thanks to the 3 buys and 1 hold set over the past three months. In addition, the average price target of $62.50 suggests ~30% upside potential. (See the PATK stock forecast at TipRanks)

To find stocks that have received the highest recent street ratings, visit TipRanks Analyst’s Top Stocks Tool. The tool also reveals which stocks have fallen the most over the past three months – allowing you to identify the best stocks trading at compelling levels.

Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.

Source link

Leave a Reply

Your email address will not be published. Required fields are marked *