For the past two weeks, small cap value names have outperformed the S&P 500. To illustrate this, you can take the iShares Russell 2000 Value ETF (NYSEARCA: IWN) and divide it by the S&P 500 index on a weekly chart. While the outperformance wasn’t dramatic, it is part of a bottoming process that has been building since late March. Looking forward, the potential for this class of companies could be huge and here are five names that may lead the way.
A value stock is a company that is trading at a discount to what it is perceived to be worth. Some investors will take a discounted cash flow model or look at valuation ratios. At times, a company isn’t a value presently, but will be trading at a discount in the future if earnings or sales grow fast enough.
The following five companies are stocks that are holdings within the iShares Russell 2000 Value ETF that have the best combination of attractive valuation and opportunity for near-term price appreciation.
Small Cap Value Stock #1: Emcor Group Inc (NYSE: EME)
Emcor is an electrical and mechanical construction, and facilities services company. The company is up nearly 20% in the past month and recently broke out to a multi-month high.
In their August 3 earnings report they ended up beating analyst estimates by 61.8% and received significant positive revisions to their current and next quarter’s EPS and current and next fiscal year EPS. Despite the positive revisions, the earnings picture is still showing declines year-over-year in the coming quarters and fiscal years.
The near-term expectation for the stock is to retest its 52-week high near $90.
Small Cap Value Stock #2: Aaron’s, Inc (NYSE: AAN)
Aaron’s is a lease-purchase company for credit-challenged customers to buy furniture, appliances, jewelry, mattresses, and other products. The company is up over 30% in the past month and made a huge jump following its earnings announcement on July 29.
The gap in the price followed the earnings release that saw its Q2 EPS beat estimates by 51.3%. The results of the earnings beat led to upward guidance that found analysts raise estimates for the coming quarters and fiscal years. Current analyst estimates reflect a 5-year EPS growth of 14.8%.
The near-term expectation for the stock is to reach $70.
Small Cap Value Stock #3: Valley National Bancorp (NASDAQ: VLY)
Valley National Bancorp is a holding company that operates in commercial lending, consumer lending, and investment management. The company is up over 8% in the past month and was able to find support on high volume following the earnings report.
The report itself was unexceptional as the company beat estimates by 9.5%. Following the report, there were slight upward revisions, but the price is broke resistance on August 7 and is looking to retest the resistance as support. With a steepening yield curve, it is setting up a bullish environment for regional banks like VLY. The steeper curve helps to improve net interest margins from lending.
The near-term expectation for the stock is to retest its June 8 high near $9.60.
Small Cap Value Stock #4: Ovintiv Inc (NYSE: OVV)
Ovintiv is involved in the exploration and production of natural gas, oil and natural gas liquids. They operate in the Permian Basin in Texas, the Anadarko in Oklahoma, and the Montney in Canada. In the past 30 days, the company is up over 22%.
On Monday, the stock made the highest close since February 25. From an earnings standpoint, the company has been significantly impacted by the fall in oil and gas prices. However, with prices on Natural gas prices on the rise and the oil prices stabilizing over $40, it places producers in a bullish position that have gotten their costs under control.
The near-term expectation for the stock is to retest its next resistance level near $15.50.
Small Cap Value Stock #5: Radian Group Inc (NYSE: RDN)
Radian Group is a mortgage and real estate service company. Its mortgage insurance segment offers private mortgage insurance and residential loans. In the past month the share price has risen over 10% and is currently resting on the 50-day moving average.
The Q2 EPS missed the analyst estimate significantly. However, the guidance for the coming quarters has prompted significant increase in the current quarter and next quarter EPS. The current numbers are well below what they earned last year, but the upgraded expectations help create bullish momentum.
The near-term expectation for the stock is to retest its June 8 high near $19.50.