Small Caps Have Lagged; Here Are 10 Morningstar Picks With Potential

Small-cap stocks have lagged the overall market this year, with the Russell 2000 index of small stocks up 3%, compared with a 13% gain for the S&P 500.

Small-caps are tied more to economic growth than the market as a whole is, and many investors expect a continued slowdown for the economy.

The small-capitalization stocks have underperformed large-caps over the past three-, five- and 10-year periods, too, according to Morningstar, based on its own indexes.

The underperformance of small-caps may present a buying opportunity. They’re trading at much more attractive prices than large-cap stocks across all investment styles, says Morningstar’s chief U.S. market strategist, David Sekera.

Morningstar put together a list of the top 10 small-cap stocks to buy for the long term. All the companies received wide or narrow moat ratings from the firm, meaning Morningstar analysts believe these companies have durable competitive advantages.

The companies’ management teams earn a Morningstar capital allocation rating of standard or exemplary, “suggesting that the balance sheet and investment decisions are well managed,” Morningstar said. 

The stocks also trade below Morningstar’s fair-value estimates.

Apparel, Ride-Sharing, Travel Software

Hanesbrands  (HBI) – Get Free Report, the apparel company. Morningstar moat rating: narrow. Morningstar fair value estimate: $20. Recent price quote: $4.30.

“Hanesbrands is the market leader in basic innerwear in multiple countries,” wrote Morningstar analyst David Swartz. “Its key innerwear achieve premium pricing.”

Of course, “the firm faces challenges from inflation, slowing demand for apparel, higher interest rates, and a competitive athleisure market,” he said. “But Hanes’ share leadership in replenishment apparel puts it in position for improving results after 2023.”

Lyft  (LYFT) – Get Free Report, the ride-hailing company. Moat: narrow. Fair value estimate: $32. Recent quote: $10.15.

“In the U.S. market, Lyft has quickly emerged as the No. 2 ride-sharing player, a position we think the firm will keep for years to come,” wrote Morningstar analyst Ali Mogharabi. “It has successfully gained share going head to head against the market leader, Uber  (UBER) – Get Free Report.

Sabre  (SABR) – Get Free Report, a travel software company. Moat: narrow. Fair value: $10.50. Recent quote: $3.05.

The company trades below Morningstar’s fair value estimate “primarily due to liquidity and near-term economic growth concerns,” wrote Morningstar analyst Dan Wasiolek.

“Our base case remains that Sabre will be able to service and refinance its debt obligations, barring a severe and prolonged recession or tightening in credit markets.”

AMC Networks  (AMCX) – Get Free Report, the television network owner. Moat: narrow. Fair value: $27. Recent quote: $10.65.

“AMC Networks has transformed its flagship AMC channel from a minor cable channel showing classic movies into a premier prestige platform for original scripted content,” wrote Morningstar analyst Neil Macker.

“The transformation provides AMC with growth potential. But this growth remains contingent on AMC’s ability to source and cultivate strong original content and to monetize programs internationally and on streaming platforms.”

Department Stores, Auto Retailer

Nordstrom  (JWN) – Get Free Report, the department store chain. Moat: narrow. Fair value $40. Recent quote: $18.05.

Lithia Motors  (LAD) – Get Free Report, an auto retailer. Moat: narrow. Fair value: $507. Recent quote: $284.50.

Compass Minerals  (CMP) – Get Free Report, a salt and potash fertilizer producer. Moat: wide. Fair value: $65. Recent quote: $33.23.

Comerica  (CMA) – Get Free Report, a bank. Moat: narrow. Fair value: $76. Recent quote: $40.45.

Asbury Automotive Group  (ABG) – Get Free Report, another auto dealer. Moat: narrow. Fair value: $396. Recent quote: $227.65.

Adient  (ADNT) – Get Free Report, an auto seat suppler. Moat: narrow. Fair value: $68. Recent quote: $35.90.

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