The market was unkind to small-cap stocks in 2023. The Russell 2000 index only gained 2.2% this year while the largest stocks as measured by the S&P 500 jumped almost 19%. It’s not surprising, since small-caps feel the impact of high inflation and rising interest rates more than their bigger brethren. Because the Federal Reserve rapidly ramped up rate increases throughout the year and inflation remained elevated, small caps lagging behind is understandable.
But these things tend to run in cycles. Over longer periods, small-cap stocks handily outperform mid- and large-cap stocks. Indicators show the balance may be shifting in favor of small caps again. Over the past month, both the Russell 2000 and the S&P 500 are up 10%. The Fed paused its rate hike program and inflation is holding steady. That could indicate it’s time for small companies to find their footing once more.
The following three companies are unstoppable small-cap stock picks ripe for the picking in December.
Shutterstock (SSTK)
Online stock photography outlet Shutterstock (NYSE:SSTK) fell victim to artificial intelligence (AI).
When you can ask a generative AI program to craft an image that is just as lifelike and “real” as any photo taken by a photographer, the need for actual photos is diminished. The market felt Shutterstock’s entire business model was standing on a shaky foundation. Shares plummeted 60% from their highs. But it turns out that the online photo site found a way to profit from AI.
Third-quarter results were tough, but they still show a path to redemption. Revenue jumped 14% year over year (YOY) as enterprise revenue rocketed 45% higher for the period. That was brought on by tremendous growth in AI partnerships. Revenue went from $1.5 million last year to $45.5 million this year as Shutterstock collaborated with OpenAI, the creator of the ChatGPT chatbot.
The partnership gave Shutterstock access to the latest technology, including DALL-E 3. Also, it added new creative AI tools to its subscription plans allowing users to generate new images that make the stock photos their own.
Yet, enterprise revenue had been the smaller component of Shutterstock’s business. It’s good that it’s growing but it’s now the largest segment due to the e-Commerce business declining. Revenue in that segment fell 15% from last year. Plus, subscriptions dropped. But Shutterstock sees a U-turn coming over the next several quarters. With the stock trading at steeply discounted valuations, buying now gives you the chance to beat the Street in recognizing its potential.
PGT Innovations (PGTI)
Window and door manufacturer PGT Innovations (NYSE:PGTI) sounds like a risky business with the current housing market.
Rising mortgage rates impacted new home sales in October, as sales fell more than expected from the month before even as they were higher YOY. Moreover. the median price of homes plunged too. The housing environment looks as weak as just before the financial markets collapse back in 2008.
Yet, it depends on the market. The U.S. Census Bureau reports housing sales in the South remain robust. They were up 2% from September and are 19% above the year-ago figure. That’s the biggest increase of any market in the country, and it bodes well for PGT whose business is concentrated in Florida and the Gulf Coast states. The southeast market represents three-quarters of total sales with the West comprising the rest.
PGT specializes in airborne debris impact-resistant windows and doors, perfect for a market subject to hurricanes. Third quarter sales rose 4% to over $400 million generating net profits 29% higher than last year. Year-to-date (YTD) revenue is well over $1.1 billion.
Even though the stock is up 82% in 2023, it is still cheap. It trades at 13 times earnings estimates, 14 times free cash flow (FCF), and Wall Street expects profits to grow faster over the next five years than they did over the previous five. This unstoppable small-cap stock has more room to run.
Koppers Holdings (KOP)
When investors think of railroads, they tend to focus on the freight hauled. When they think of electric utilities, it’s the resources used to generate energy. What they tend not to think about are the crossties used to support the rails or the poles holding up the power lines. Koppers Holdings (NYSE:KOP) is a leading supplier of both here in the U.S. and in Australia. Also, it is a major manufacturer of creosote and other wood preservative chemicals.
So, it’s those small, out-of-the-way businesses that were a favorite of investing legend Peter Lynch. During his tenure at Fidelity Magellan, Lynch went from $20 million in assets under management (AUM) to $14 billion AUM in 13 years. Additionally, he averaged 29% annual returns over that period making him one of the greatest money managers of all time.
Koppers just might be the sort of business Lynch would love. Record third-quarter sales of $550 million caused profits to swell 37% over last year. The stock is up 57% in 2023 but is an even better bargain than either Shutterstock or PGT Innovations.
Koppers stock goes for just 9x next year’s earnings, or half the long-term earnings growth rate Wall Street expects. Plus, it trades for a tiny fraction of its sales, making it a stock to buy in December regardless of its size.
On the date of publication, Rich Duprey did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
