3 Underperforming Small Caps Ready to Run

U.S. small-cap stocks went toe to toe with large caps last year. Both the Russell 1000 and the Russell 2000 indices returned approximately 18% for investors that rode the ups and downs of the unusual year.

This year the story has been different. Small caps have lagged their bigger brethren with the two asset classes up 12% and 19%, respectively, year-to-date.

The underperformance can be attributed to several factors including the relative sector exposures and the dominating performance of mega-caps like Microsoft, Google, Facebook, and Nvidia.

Yet considering small-cap stocks have typically done better than large caps during periods of economic recovery, there may be some opportunity here. Small-cap investors inherently take more risk and should ultimately be rewarded for it, right?

Here are three undervalued small-cap underperformers with favorable risk-reward tradeoffs.

Is Silk Road Medical a Good Long-Term Play?

After climbing 56% last year, Silk Road Medical (NASDAQ: SILK) has failed to build off the momentum. The medical device stock is down 15% year-to-date but looks to be recharging for another run.

Silk Road Medical makes instruments that reduce the risk of stroke. It developed a novel procedure called transcarotid artery revascularization, or TCAR, as an alternative to traditional surgical approaches. The minimally invasive technique is gaining traction in the market due to its relative safety and effectiveness. In the second quarter 3,650 TCAR procedures were performed, a sequential increase of 22%.

The adoption of Silk Road’s approach has yet to translate into profits, but it is on the right path. As more physicians gain awareness and proper training on TCAR, the company could reach a critical mass whereby revenue growth starts translating into profits. A lesser need to spend on marketing should help in this regard.

Profitability is still probably a few years away, but Silk Road is in the early part of getting its story out there. Investors that take the risk here could be rewarded with a long road of growth.

Is Harsco Stock Undervalued?

Harsco (NYSE: HSC) had a tough go of it in 2020. With its end markets significantly impacted by pandemic closures and restrictions, its financial results were down sharply and its share price down 22%.

It’s been a slow start this year, but things finally seem to be turning in Harsco’s favor. The 168-year-old company’s environmental solutions and engineered products are witnessing increased demand during the economic recovery. All three business segments—Environmental, Clean Earth, and Rail—are seeing higher volumes and are expected to remain strong in the back half of the year. Harsco’s largest division, Environmental, provides critical services for steel producers and solutions for metals manufacturers both of whom are revving back up.

The financials are looking better as well. Improved cash flow combined with cost reduction initiatives are driving higher margins and allowing the company to pay down debt. With debt roughly two-thirds of the capital structure, though, more progress in reducing leverage would increase Harsco’s ability to pursue growth projects as its end markets rebound.

Harsco is trading at 20x this year’s earnings compared to the average P/E for the industry of 33x. This is a company that is suddenly firing on all cylinders and given the inexpensive valuation the stock should soon reflect it.

What is a Good Small Cap Value Stock?

Tupperware (NYSE: TUP) shares deserve a breather after skyrocketing 278% last year. The classic container company has seen its stock slide 28% this year on profit-taking and concerns that the hyper demand experienced during pandemic stockpiling will amount to a one-time fad.

Hopefully, we do not see the level of consumer hoarding that took place in 2020 anytime soon. And sure, people are spending less time at home these days which translates to more meals out and less demand for plastic storage units. However, it would be foolish to assert Tupperware’s growth days are over.

In fact, analysts are predicting the company will build off its blockbuster performance by posting EPS growth in 2021 and 2022. And with 15% bottom-line growth forecast for next year, there is a major disconnect with the forward P/E multiple of 6x.

Like any other consumer products company, Tupperware is constantly innovating to meet consumer needs and create unknown needs. The list of container sizes, shapes, and materials is seemingly endless—and despite the presence of lower quality knockoffs, people are willing to pay a premium for a brand they know and trust.

One thing that hasn’t changed over the years is Tupperware’s unique sales force which is now almost 600,000 strong. Although we think of Tupperware as an American brand, 70% of revenue is generated outside North America. And with no or minimal presence in many emerging countries, there is still plenty of room for overseas expansion.

Tupperware is in the midst of a turnaround plan that is working as well as its microwave-safe glassware. Management’s focus on top-line growth, margin improvement, and debt reduction makes this a small-cap value play that can’t be contained.