Worn out by the relentless bear market of 2022? Well, good news. According to Bank of America, the stage is set for a 2023 bull run. But more interestingly, given current conditions, the market leaders are not invited to this party with those further down the food chain to are at the top.
Or, as BofA chief investment strategist Michael Hartnett puts it, “secular trends of stagnation, recovery, localization, fiscal stimulus = small-cap bull in 2023.”
Hartnett has history on his side. Similar to how the market behaved 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 the past. “Stagflation continued into the late 1970s, but once the inflation shock of 1973/1974 wore off, US small caps entered one of the great bull markets of all time,” Hartnett added.
With that in mind, we dug into the TipRanks database and pulled together two small-cap stocks rated as Strong Buys by analyst consensus. 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 to move forward if BofA’s thesis works out.
H&E Equipment Services (HEES)
There are many jobs that only require equipment on a temporary basis, particularly for large-scale industrial work. This is where H&E Equipment Services comes into play.
H&E is one of the largest equipment rental companies in the US and derives most of its revenue from the rental of various construction and industrial equipment, including earthmoving tools, aerial work platforms, industrial carts, air compressors and material handling equipment, among others. . The company also offers a number of different services, such as sales of new and used equipment and repairs and maintenance.
As of 2021, the company had 102 branches in 24 states. To give you an idea of the size, H&E’s portfolio has 42,725 pieces of equipment, which on average are less than 3.5 years old.
After a somewhat uneven period, revenue has been steadily increasing throughout 2022 and this was evident in the third quarter as well. The top line showed $324.3M, up ~18% year-over-year, while also beating the Street estimate by $20.34M. Gross margin increased to ~47% vs. 41.4% seen in 3Q11, while net profit increased ~55% to $38.4 million. That led to EPS of $1.05, well above the $0.82 analysts were expecting.
Thanks to steady earnings growth, the company has been able to easily maintain its quarterly common stock dividend of $0.275. The payout has been held at this level since May 2015. At the 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 good story for investors and explains why: “HEES continues to execute on its hot start strategy and still expects at least 10 openings in 2022. We see accelerated growth from hot starts as a relatively unique feature compared to peers with less mileage. We remain bullish on the stock given this hot start strategy as well as the favorable footprint. We also see improving construction activity, rebuilding in Florida, and benefits from infrastructure bills through 2023. Despite these attractive growth factors for the company, the stock trades at a significant discount to peers, while it has a dividend yield of ~3%.
These bullish comments support Elliott’s Buy rating on HEES, while the $60 price target suggests shares will climb 47% higher in the coming months. (To follow Elliot’s history, Click here)
Looking at the consensus analysis, other analysts are on the same page. With 4 purchases and no reservations or sales, the word on the street is that HEES is a strong market. H&E shares are priced at $40.73 and their average target of $52 implies a gain of ~28% over the next 12 months. In terms of small-cap credentials, H&E’s market cap is just under $1.5 billion. (See H&E stock forecast on TipRanks)
Patrick Industries (PATK)
The next small-cap stock we’ll look at is Patrick Industries, a leader in component products and building materials. These are manufactured and sold by the company and cater to various industries such as Recreational Vehicles (RV), Manufactured Homes (MH), Marine and many other industrial segments. Deals include everything from countertops, flooring and bath/kitchenware and laminates to furniture, electronics and sound systems, appliances and more.
Through its national manufacturing and distribution network, last year the company generated sales of +$4 billion from its 70+ subsidiaries, of which over 75% came from the RV/marine industries.
The company is set to surpass that figure this year, despite the challenging macroeconomic environment. In its latest quarterly report, for the third quarter, the company generated $1.11 billion in revenue, representing a 4.7% year-over-year increase. While that represented a sequential decline from the $1.48 billion generated in the second quarter, the number beat Street expectations by $20 million. The company has also made a habit of beating EPS forecasts, and this was no different in the third quarter. Analysts were calling for EPS of $2.03, but Patrick delivered $2.43.
The company also declared a dividend for the third quarter in August of $0.33 per common share. This payout gives an annualized common stock dividend of $1.32, which in turn makes the yield 2.75%.
Among the bulls is Truist 5-star analyst Michael Swartz, who believes the market “has yet to fully appreciate the structural improvements PATK has made to its margin profile over the past 3-4 years.”
“In the event,” the 5-star analyst explained, “despite a deterioration in the production outlook in all of PATK’s key end markets since the last report (July), the company actually raised full-year margin expectations. While we expect some annual gross margin pressure to continue in 1H23, we increasingly believe the company can sustain 20% gross margins and 10%+ EBITDA 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 number is reached, investors will earn 25% annually from now. (To watch Swartz’s record, Click here)
Similarly, other Wall Street analysts have been impressed by PATK. It earns a ‘Strong Buy’ consensus rating thanks to 3 buys and 1 hold assigned in the last three months. Moreover, the average price target of $62.50 implies ~30% upside potential. (See PATK stock prediction on TipRanks)
To find stocks that have received the most bullish recent ratings from the Street, visit the TipRanks Analysts Top Stocks tool. The tool also reveals which stocks have fallen the most over the past three months – enabling you to spot the best stocks trading at compelling levels.
Disclaimer: The views 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.