Following up on the theme of a dozen large-cap buy ideas, this is a list of five very unloved small-cap stocks (between $250 million and $1 billion in capitalization) that look interesting. Most people see a stat like the average year-to-date decline of these stocks being 35% and get worried, I get interested. Let’s go bottom-fishing… the order is based on market capitalization as of close Tuesday, October 16th.
1. Vaalco Energy (EGY) - $283M
Vaalco is an unloved West African oil field driller with a short ratio over 10 and 25% of its share price in cash. The primary problem is that active reserves are dwindling, and the drilling schedule in non-working fields has lingered. Shares trade at 2.1x book value, and I see upside if management begins communicating with the investors better and shows some concrete signs of progress, a la Syntax-Brillian (BRLC).
2. FreightCar America (RAIL) - $472M
A highly cyclical company, FreightCar has seen its share price languish as backlog drops and concerns about future orders have taken hold. There are a multitude of reasons I think RAIL is being unfairly sold off, and I find it hard not to like the strong cash position (35% of market cap.) and the large stakes held by Steve Cohen’s SAC Capital and Ken Griffin’s Citadel, both of whom manage hedge funds with excellent track records.
3. Advance America (AEA) - $793M
The payday lending industry has become a favorite whipping boy of politicians in a broad array of states, but the 5% dividend offered by AEA that is funded from free cash flow shows that its services are highly valued. The shares short would take over 9 days of trading volume to cover, and 40% of the company is held by insiders who aren’t selling, despite the stock being down 30% year-to-date.
4. Avatar Holdings (AVTR) - $376M
This one is the run-away winner of the unloved category; how much do you think the market loves a homebuilder specializing in development in Arizona and Florida? I don’t believe all is bad here; insiders (primarily the Chairman of the Board) own more than 40% of the company - and aren’t selling. For those of you who saw Third Avenue’s excellent manager Marty Whitman on CNBC the other day, his emphasis is on buying well-financed firms trading at a discount to net current assets. Avatar fits his criteria; as Third Avenue is a major shareholder. What could he be seeing? AVTR has paced the Homebuilders ETF (XHB) lower, down 40% this year. Shares trade at 0.71x net book value; investors are essentially getting $500M of land in Arizona and Florida (marked at cost) for $376M.
5. Steve Madden (SHOO) - $402M
The last two months or so I’ve been looking into a number of retailers, because I feel that there is far too much pessimism surrounding many of the stocks - even in the stocks of well-financed companies with strong brand names like Steve Madden, American Eagle (AEO), and Aeropostale (ARO). Wal-Mart (WMT) was even been sold off on the misguided belief that Americans are going to stop shopping. One good indicator to look for in excessively oversold issues is that the stocks will move up on bad news. Today, Madden announced that they will be negatively impacted by a “more challenging than expected sales environment,” and the company cut guidance to well below current analyst estimates; SHOO responded by climbing 7%. Does that necessarily make sense? No. But taken in the context that this $400M company has $100M in net cash and trades for 7x net income and 3.75x EBITDA, people are obviously little in the way of performance from Steve Madden, and that makes it a perfect setup ripe for future outperformance.
