Chicago, IL – April 5, 2023 – Today, Zacks Investment Ideas feature highlights Fabrinet FN, e.l.f. Beauty ELF and Encore Wire WIRE.
3 Top-Ranked Small Caps to Buy for the Next Rotation
The stocks that led the market in Q1 2023 may not be the stocks that lead in Q2, or the rest of the year. Clearly, tech, and growth stocks have been the outperformers so far this year. But is it possible to keep up such incredibly strong performance?
In the chart below we can see that over the last month the weakest relative investment was Small-Cap stocks. While focusing on the leaders can be an effective way to pick stocks, sometimes taking a look at the laggards can be a way to find areas where big funds want to rotate capital into. Even better, if you focus on a weak sector, but look for leading stocks, you can find real gems.
In this article I focus on three Zacks Rank #1 (Strong Buy), Small-Cap stocks that investors can consider buying for the next leg higher.
Fabrinet
Fabrinet provides precision optical, electro-mechanical and electronic manufacturing services to original equipment manufacturers of complex products, such as optical communication components, modules and sub-systems, industrial lasers and sensors. FN offers a broad range of optical capabilities for the entire manufacturing process including process engineering, design for manufacturability, supply chain management, manufacturing, final assembly, and test.
Fabrinet is a Zacks Rank #1 (Strong Buy) stock, indicating upward trending earnings revisions. Over the last 60 days analysts have unanimously upgraded their earnings expectations across timeframes. Earnings have been revised higher by an average of 4%.
Fabrinet also has strong sales growth expectations. Current quarter sales are expected to grow 15.6% YoY to $653 million, and current year sales are expected to grow 17.2% YoY to $2.65 billion. FN has steadily grown its sales from $678 million to $2.5 billion over the last ten years.
Fabrinet is trading at a one-year forward earnings multiple of 17x, which is below its five-year median of 19x, and below the market average 19x.
Fabrinet is an industry leading company that has been making steady incremental growth since its inception in 1999. Additionally, the company has a very strong balance sheet, with total assets of nearly $2 billion and liabilities of just $600 million.
e.l.f Beauty
e.l.f. Beauty is an American cosmetics company producing quality, affordable makeup and skincare products. ELF sells its products through national and international retailers and direct-to-consumer channels, which include e-commerce platforms in the U.S., and internationally. ELF’s products are well-known as quality cosmetic products that can be bought for very fair prices at pharmacies around the world.
ELF is currently the stock that has been a Zacks Rank #1 (Strong Buy) for the longest time. It earned the top rank back in the beginning of October 2022 and has held it since then. Over that period e.l.f. Beauty stock has rallied 113%, dramatically outperforming the broad market, and demonstrating just how powerful the Zacks Rank is.
Even after all that time on the top of the Zacks Rank, analysts are still revising ELF’s earnings higher. Over the last 90 days the current year’s earnings have been revised 27% higher.
Current quarter sales are expected to grow 47% YoY to $154 million and current quarter earnings are projected to climb 46% YoY to $0.19 per share.
With such incredible rates of growth, e.l.f Beauty trades at a premium valuation. It is currently trading at a one-year forward earnings multiple of 81x, which is above its five-year median of 62x, and above the industry average 37x.
Encore Wire
Encore Wire is a low-cost manufacturer of copper electrical building wire and cable. The Company is a significant supplier of both residential wire for interior electrical wiring in homes, apartments and manufactured housing, as well as building wire for electrical distribution in commercial and industrial buildings.
WIRE is a Zacks Rank #1 (Strong Buy) stock, indicating upward trending earnings revisions. Additionally, as a member of the Wire and Cable Products industry it sits in the top 2% of the Zacks industry rank.
Over the last 60 days, current year earnings have been revised higher by 28%, and during the last earnings report Encore Wire surprised on the upside by 80%.
Over the last ten years WIRE has been a strong performing stock outperforming both the industry and broad market. The last three years have been a real boon to the business, and the stock's trend higher really accelerated over that period. Wire has compounded at a rate of 18.5% annually.
Encore Wire is currently trading at a one-year forward earnings multiple of 9x, which is well below its 10-year median of 17x, and below the market average 19x. WIRE also boasts an extremely robust balance sheet with $2 billion in assets and just $200 million in liabilities.
Bottom Line
Small-Caps offer some of the most appealing stocks in the market today. Although large-cap stocks get most of the publicity, there are hundreds of high-performance businesses in the market with a market capitalization under $10 billion.
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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.
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