8 Small-Cap Stocks That Look Undervalued

Text size

For investors attracted to bargain-priced stocks, there still is plenty to check out among small-caps.

Barron’s screened the

S&P SmallCap 600
for the stocks with the lowest price-to-earnings ratios based on projected 2022 earnings. We selected a list of eight companies valued at six times earnings or less.

They include

Southwestern Energy

(ticker: SWN), a big natural-gas producer,

E.W. Scripps

(SSP), an operator of local TV stations, and

AMC Networks

(AMCX), which owns the AMC, IFC, and Sundance cable TV properties.

There is usually a reason that stocks trade for under six times earnings, and for this group it includes debt and doubts about earnings sustainability. The flip side is that the market may be overly punishing these companies and if that’s the case, the upside in the stocks can be substantial given such low valuations.

Southwestern Energy has trailed peers as gas prices have run up because the company hedged over 70% of its 2022 gas production at well below current prices. It’s not an analyst favorite, but the shares, at around $5, trade for about four times projected 2022 earnings and offer a play on an extended period of high gas prices.

Home builders

Century Communities

(CCS) and

Meritage Homes

(MTH) are inexpensive because Wall Street doubts the strength in home sales and prices can persist. Century Communities, at a recent $64, and Meritage, at $104, trade for under five times projected 2022 earnings.

J.P. Morgan analyst Michael Rehaut is bullish on both. He calls Colorado-based Century, a top 10 builder nationally, a higher-growth, high-return builder with a projected return on equity of over 20% in 2021 and 2022. He has a price target of $89 on the stock. It’s a similar story at Arizona-based Meritage, the No. 6 builder in the country. Rehaut has a price target of $143.

Like other cable-TV programmers, AMC Networks is out of favor with investors as investors worry about cord-cutting and the streaming threat. AMC has a group of streaming services led by AMC+, but hasn’t provided much financial information about them. Plenty of risk is reflected in the stock, which at around $43, trades for less than six times estimated 2022 earnings of about $8 a share.

With three U.S. smelters and one in Iceland,

Century Aluminum

(CENX) is getting a lift from higher aluminum prices. At a recent $16, the stock trades for under five times 2022 earnings.

After Century Aluminum’s second-quarter earnings reports, B. Riley Securities analyst Lucas Pipes wrote that it’s “well-positioned to benefit from the rapid improvement in aluminum pricing” and premium prices for the light metal in the Midwest, a major market.

Houston-based auto dealer

Group 1 Automotive

(GPI) has a big presence in Texas and operations in the U.K. and Brazil. At a recent $200, it trades for less than six times projected 2022 earnings, a discount to peers J.P. Morgan analyst Rajat Gupta favors the stock in part because of its expanding used-car business. He has an Overweight rating and price target of $215.

With ample debt, TV broadcaster E.W Scripps amounts to a leveraged play on the advertising market through its local TV stations and the ION network. The stock, at around $18, trades for less than five times projected 2022 earnings. Wells Fargo analyst Steven Cahall is bullish and has a $27 price target. He sees free-cash flow averaging over $3 a share this year and in 2022.

Endo International

(ENDP), a maker of branded and generic drugs, trades for just two times projected 2022 earnings because of high debt and opioid liabilities. Shares were recently around $5.

The company’s market value of $1 billion is dwarfed by its net debt of more than $6 billion. J.P. Morgan analyst Chris Schott has an Underweight rating on the stock, citing recently “high leverage” and “pending opioid liabilities (with no apparent end in sight).” 

Write to Andrew Bary at [email protected]