Even as the S&P 500 marks new highs, some investors see small-cap value stocks as today’s best bet for long-term growth. Many are becoming increasingly nervous about index-based stock concentration. For example, S&P 500 investors rely more and more on mega-caps like Nvidia (NASDAQ:NVDA) as they beat out all other indexed stocks to pull the entire benchmark higher. But the reverse holds true, and a few missteps could bring your entire portfolio to its knees.
On the contrary, small-cap value stocks offer two key differentiators: they’re sufficiently small and nimble to adapt to changing conditions while offering long-term growth potential, and their value qualities help retain capital. In many cases, that means solid income and dividend opportunities.
These small-cap value stocks blend the best of those characteristics and stand out as one of the best ways to diversify risk away from a handful of Magnificent 7 stocks controlling your portfolio’s destiny.
H&R Block (HRB)
H&R Block (NYSE:HRB) is a unique fintech-esque pick among small-cap value stocks, especially during tax season, but its achievements span the entire calendar year. To mitigate the seasonal nature of the tax business, management introduced Spruce, a mobile banking service that has gained popularity. In its recent earnings report, H&R Block credited $26 million of its quarterly revenue to this financial service, a significant contribution alongside its $99 million in tax preparation sales. Furthermore, HRB is embracing technology to refine the tax filing experience, developing an AI-powered tax assistance tool in partnership with Microsoft (NASDAQ:MSFT).
HRB offers an impressive total yield of 11.25%, distinguishing itself from other small-cap value stocks. That high yield is supported by a conservative payout ratio of 33.24%, showcasing HRB’s strategy of balancing shareholder rewards with reinvesting earnings into growth opportunities. Tax season is just getting started, and as H&R Block incentivizes filers to sign up for Spruce in exchange for early tax refund deposits, expect post-April earnings reports to reflect the shift in emphasis toward recurring revenue opportunities.
Small-Cap Value Stocks: Iridium Communications (IRDM)
Everyone’s favorite growth stock guru, Cathie Wood, loves Iridium Communications (NASDAQ:IRDM), but this doesn’t diminish its identity as a small-cap value stock. Iridium’s shares have experienced a 30% decline since the beginning of 2024, marking what could be an optimal entry point for investors aiming to include this small-cap value stock in their portfolios.
The primary cause of its recent decline was the decision to end its joint venture with Qualcomm (NASDAQ:QCOM) in November. The collaboration initially sought to leverage Qualcomm’s expertise in cell-centric semiconductors to develop chips allowing standard cell phones to connect to Iridium’s low-earth orbit satellite array. The termination of this partnership left Iridium looking somewhat sidelined in the rapidly changing space-based telecom sector.
However, Iridium is doubling down on efforts to meld its satellite networks with consumer smartphones, a move that could significantly enhance its market value if it proves successful. The company is shifting its strategy to adapt satellite protocols for compatibility with existing mobile devices instead of reengineering cell phones to suit satellite functions. That approach aims to broaden Iridium’s potential market, offering new avenues for growth for this small-cap value stock.
Apartment Income REIT Corp. (AIRC)
Higher interest rates typically dampen the new mortgage market while pushing rents upward in response to inflation — trends that underscore small-cap value stock Apartment Income REIT Corp’s (NYSE:AIRC) strength in a high-interest-rate climate.
For the last decade, Apartment Income right-sized its multifamily building portfolio, focusing on premium properties in urban areas with strong demographic growth. That strategic emphasis yields consistently high occupancy rates and regular rent increases. The future demand for AIRC’s properties is likely to be driven by job and income growth, declining rates of homeownership and the continuous draw of city living — all factors exacerbated by rising interest rates.
Apartment Income REIT Corp. has meticulously refined its portfolio and operational strategy, reducing its property holdings from 300 in 2008 to 75 today while preserving a strong presence in key markets. That shift reflects savvy management choices, emphasizing quality and operational efficiency in preferred locales rather than mere expansion. AIRC boosted its growth potential by moving away from lower-growth areas, ensuring its resilience against interest rate changes.
With a 5.6% forward yield, AIRC offers diversification among small-cap value stocks and strength even amid economic uncertainty.
Small-Cap Value Stocks: Evergy (EVRG)
Evergy (NASDAQ:EVRG) is a small-cap value stock at the unique intersection of utility stock stability and sustainability stock growth potential. Serving customers in Kansas and Missouri, Evergy ranks as the second-largest producer of wind energy in the United States. The company recently increased its quarterly dividend by 5% to $0.6425 per share, offering a forward yield of 5% to investors interested in green energy.
Facing challenges similar to those in the REIT and consumer staples sectors, utilities have been under pressure this year due to price caps and rising energy costs, leading to tighter margins. Since January, the utility sector has seen a nearly 10% decline, with Evergy experiencing a 4% drop, slightly beating sector competitors. Despite this, Evergy’s focus on sustainable energy solutions and dividend growth strategy enhance its attractiveness to income-oriented investors.
Evergy resolved a rate adjustment dispute with Kansas regulators in November, a move likely to help realign the company’s trajectory and reinforce its competitive edge. As utilities often grapple with the high costs associated with debt and expanding wind power capabilities, these sectors face unique challenges. However, should the anticipated Federal Reserve rate cuts come to pass, Evergy is well-positioned to make a strong comeback.
Perimeter Solutions (PRM)
Perimeter Solutions (NYSE:PRM) is a small-cap value stock specializing in firefighting equipment, particularly fire suppression and extinguishment chemicals. Demonstrating significant growth since 2010, Perimeter reported a compound annual growth rate (CAGR) of 7.2% since that year. Management also forecasts its revenue to soar to $100.2 billion by 2027 from $70.8 billion in 2022. Steady demand for firefighting equipment underpins its success, suggesting a robust outlook for the company.
Perimeter’s goal is to offer “private equity-like returns with the liquidity of a public market,” a target it consistently hits. And, with a price-to-book ratio of only 0.80, PRM seems somewhat undervalued despite recent success. To that end, management also embarked on an aggressive buyback program to boost shareholder value, generating an 11.24% total yield in 2023 and a 6.92% total yield over the preceding 12 months. Due partially to its buyback and partly based on pure expansion opportunity, shares surged almost 40% year-to-date. But it isn’t too late to snag a piece of this small-cap value stock.
Small-Cap Value Stocks: Aspen Aerogels (ASPN)
As environmental friendliness and corporate compliance continue to pressure industrial operations, chemical insulation company and small-cap value stock Aspen Aerogels (NYSE:ASPN) stands to benefit. Aspen Aerogels specializes in creating aerogel-based insulation materials designed for the high-temperature conditions of oil refineries and power plants. That specialization establishes Aspen as a key component in sustainability efforts for scaled manufacturing and similar working environments. Despite its critical role, this small-cap value stock tends to be overlooked by retail investors, even though institutional analysts unanimously rate it a Buy.
Aspen is not yet profitable, but its fourth-quarter performance proved promising after a significant loss reduction — reporting a mere $0.5 million loss compared to the previous year’s $9.6 million. And, despite posting a negative net income, the company’s revenue increased over four consecutive quarters, culminating in record sales figures most recently. With Aspen Aerogels working to broaden its market reach and improve its profit margins, anticipation for heightened investor interest in 2024 is growing, positioning this small-cap value stock as a standout among sustainable solutions.
Hanesbrands (HBI)
Hanesbrands (NYSE:HBI), a leading seller of innerwear clothing, dominates 60% of the total addressable market across several countries, making it one of the most well-known small-cap value stocks on the market. Its bottom-barrel valuation includes a 0.35x price-to-sales ratio, even as its clothing line remains popular worldwide.
The company has faced challenges, including supply chain disruptions and weakened consumer confidence, prompting Hanes’ management to streamline operations and refine its strategic focus. Recently, the company began seeking preliminary offers for its Champion clothing line, signaling a strategic shift away from athletic wear to concentrate more on its foundational innerwear products. The initial bidding is rumored to start at $1.4 billion, a move that promises a substantial influx of funds and aligns with Hanes’ objective to sharpen its business focus.
Last year, Barington Capital Group, an activist investment firm, publicly urged Hanes to implement cost reductions, reduce inventory levels and improve profit margins in an open letter. It appears that Hanes may have drawn inspiration from Barington’s recommendations in pursuing the Champion transaction, indicating the beginning of a recovery phase for this small-cap value stock.
On the date of publication, Jeremy Flint held no positions (directly or indirectly) in the securities mentioned. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
