7 Small-Cap Value Stocks Leaving the S&P 500 in the Dust

7 Small-Cap Value Stocks Leaving the S&P 500 in the Dust

These small-cap value stocks are positioned to outperform the over-concentrated mega-cap indices

7 Small-Cap Value Stocks Leaving the S&P 500 in the Dust

Even as the S&P 500 reaches new highs, some investors view small-cap value stocks as the best option for long-term growth. Concerns are growing about the concentration of investments in index-based stocks. For instance, S&P 500 investors increasingly depend on mega-cap companies like Nvidia (NASDAQ:NVDA) to drive higher benchmarks. This reliance is a double-edged sword; a few missteps by these companies could significantly impact an entire portfolio.

In contrast, small-cap value stocks offer two key advantages: they are small and agile enough to adapt to changing conditions, providing long-term growth potential, and their value characteristics help preserve capital. This often translates to solid income and dividend opportunities.

These small-cap value stocks combine these strengths, making them one of the best strategies to diversify risk away from the few dominant stocks controlling your portfolio’s performance.

Apartment Income REIT (AIRC)

Small-Cap Stocks. most undervalued small-cap stocks to buy in April

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Higher interest rates typically dampen the new mortgage market while pushing rents upward due to inflation. These trends highlight the resilience of Apartment Income REIT (NYSE:AIRC), a small-cap value stock, in a high-interest-rate environment.

Over the past decade, Apartment Income optimized its multifamily building portfolio, focusing on premium properties in urban areas with strong demographic growth. This strategic emphasis has resulted in consistently high occupancy rates and regular rent increases. Future demand for Apartment Income’s properties will likely come from job and income growth, declining homeownership rates and the continued appeal of city living — factors amplified by rising interest rates.

Apartment Income meticulously refined its portfolio and operational strategy in recent years, reducing its property holdings from 300 in 2008 to 75 today while maintaining a strong presence in key markets. This shift reflects savvy management decisions, prioritizing quality and operational efficiency in preferred locales over mere expansion. Management bolstered its growth potential by moving away from lower-growth areas and ensured resilience against interest rate fluctuations.

With a 4.65% dividend yield, Apartment Income offers a strong diversification option among small-cap value stocks, demonstrating strength even amid economic uncertainty.

Perimeter Solutions (PRM)

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Perimeter Solutions (NYSE:PRM) is a small-cap value stock specializing in firefighting equipment, notably fire suppression and extinguishment chemicals. Since 2010, Perimeter has demonstrated substantial growth, with a compound annual growth rate (CAGR) of 7.2%. Management projects its revenue will rise to $100.2 billion by 2027 from $70.8 billion in 2022, driven by steady demand for firefighting equipment, underscoring the company’s robust outlook.

Perimeter aims to deliver “private equity-like returns with the liquidity of a public market,” a target it consistently achieves. With a price-to-earnings ratio below 12x, Perimeter appears undervalued despite its recent success. In line with this, management has initiated an aggressive buyback program to enhance shareholder value, resulting in an 11.24% total yield in 2023 and a 7.2% total yield over the preceding 12 months. This buyback program and significant expansion opportunities have propelled shares more than 60% year-to-date. However, there is still time to invest in this promising small-cap value stock.

H&R Block (HRB)

H&R block storefront in Canada. HRB stock.

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H&R Block (NYSE:HRB) stands out as a unique fintech-esque choice among small-cap value stocks, especially during tax season, though its successes extend throughout the year. To counter the seasonal nature of its tax business, management introduced Spruce, a mobile banking service that has quickly gained traction. In its recent earnings report, H&R Block attributed $41 million of its quarterly revenue to this financial service, complementing its $1.5 billion million in tax preparation sales. Additionally, HRB is leveraging technology to enhance the tax filing experience by developing an AI-powered tax assistance tool in collaboration with Microsoft (NASDAQ:MSFT).

HRB boasts an impressive total yield of 10.94%, setting it apart from other small-cap value stocks. This high yield is backed by a conservative payout ratio of 29%, demonstrating HRB’s strategy of balancing shareholder rewards with reinvestment into growth opportunities. Though tax season is over, H&R Block incentivized filers to sign up for Spruce in exchange for early tax refund deposits. Because of this, expect Spruce’s recurring revenue to be a major cash cow for H&R Block for the remainder of 2024.

Steelcase (SCS)

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Steelcase (NYSE:SCS), a high-end home office and corporate furniture manufacturer, is a small-cap stock combining stability and significant upside potential. The company has effectively navigated the post-pandemic shift towards work-from-home trends and continues to innovate in response to economic challenges.

Steelcase quickly regained financial stability after pandemic-related setbacks. Its latest annual earnings report showed a net income of $81.1 million, more than double the previous year’s figure. Additionally, the company has maintained steady sales of around $3.2 billion over the past two years, demonstrating its ability to improve margins without compromising quality.

In response to the ongoing shift toward remote work, Steelcase aims for 5-7% annual sales growth and a 5% free cash flow margin as a percentage of revenue over the next five years. Furthermore, the company has significantly reduced its debt to better manage the higher interest rate environment, enhance liquidity and lower interest costs. These strategic moves position Steelcase as a top small-cap value stock in today’s market.

Garrett Motion (GTX)

Photo of steel blue electric car being charged with wind silos and blue sky in the background. EV

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Garrett Motion (NASDAQ:GTX) offers significant advantages as a small-cap value stock. It trades at just 6.8x earnings and below 0.5x sales yet remains an underappreciated player in the green tech and sustainable driving sector. The company produces automotive parts that enhance emission reductions and support zero-emission technologies, including alternative fuel engines and turbochargers for gasoline and diesel vehicles.

While “pure” EV companies like Tesla (NASDAQ:TSLA) are falling out of favor due to declining consumer interest, evidenced by the rise in hybrid and gasoline vehicle sales, Garrett Motion presents a unique opportunity. It acts as a bridge for investors committed to long-term sustainability but recognizes that global EV adoption is still a distant goal.

Garrett Motion’s recent stock dip followed an earnings report showing a 6% decrease in quarterly sales. However, its annual sales remained stable, and the company maintained healthy margins and free cash flow. This stock is undervalued and often overlooked as investors pursue more prominent growth opportunities. Nonetheless, as automakers adjust their EV planning timelines, Garrett Motion is poised to become a major player in the small-cap value stock market.

Medifast (MED)

medicine research, pharmaceutical background, LJPC stock

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Medifast (NYSE:MED) has not joined the broader weight loss trend, which has impacted many pharmaceutical stocks. However, this doesn’t diminish the long-term potential for the nutrition and weight loss company to expand its product offerings across various platforms, including multi-level marketing.

Medifast posted a solid $0.76 earnings per share in its first-quarter earnings report. Additionally, the company maintains a robust balance sheet with a $150 million cash reserve and no debt, a significant advantage in today’s high-interest-rate environment. The company’s executives strive to differentiate themselves from larger weight loss competitors.

Medifast is pursuing a more comprehensive and holistic approach to customer management, focusing on guided habit development and personalized coaching. Management has indicated that “2024 will be a year of investment for future growth.” While this may impact its current 15% dividend yield, it does not undermine the company’s long-term growth potential.

Cricut (CRCT)

A photo of someone using a Cricut machine.

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Crafty enthusiasts and DIY creatives adore Cricut (NASDAQ:CRCT), but the small-cap value stock often doesn’t receive the investor attention it deserves. Despite a slight revenue decline in its most recent earnings report, the company still offers investors a 1.83% trailing yield. Cricut is poised to benefit from improving consumer sentiment, especially as buyers seek cost-effective stay-at-home activities to manage household budgets better.

Overall sales fell by 8% in the first quarter of 2024, though increased paid subscribers and higher machine sales partially offset this. This indicates that more people have started their Cricut journey recently, suggesting a future sales boost as these new users purchase and replenish crafting supplies.

Now is an opportune time to invest in Cricut. The company’s management announced a special one-time dividend of $0.40 in the latest earnings report. As of July 2nd, Shareholders of record will receive this significant distribution on July 19th, so there’s still time to get involved.

On the date of publication, Jeremy Flint held no positions in the securities mentioned. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Jeremy Flint, an MBA graduate and skilled finance writer, excels in content strategy for wealth managers and investment funds. Passionate about simplifying complex market concepts, he focuses on fixed-income investing, alternative investments, economic analysis, and the oil, gas, and utilities sectors. Jeremy’s work can also be found at www.jeremyflint.work.

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