5 Small Cap Stocks With Growth AND Value

Genia Turanova's picture

Thursday, June 20, 2019 - 2:30pm

by Genia Turanova

Most of the stocks we consider for our portfolio over at Fast-Track Millionaire are so-called "growth" stocks. This should not surprise anybody: we look for the leaders of tomorrow, for future Googles or Amazons, before they become household names. The best of these fledgling companies usually have one thing in common: outsized growth.

Investors are willing to pay up for growth prospects that are out of the ordinary -- hence the high valuations, whether measured in price-to-earnings (P/E), price-to-sales (P/S) or price-to-book (P/B). 

In fact, some of the stocks we have in the portfolio don't even have a meaningful P/E ratio. That's because they don't have much in terms of earnings -- or have not earned any money at all yet. They eventually will -- if everything goes right -- but not this or next year. 

In such cases, P/B ratio can be used. The company's book, or accounting, value is measured as the difference between the company's assets and its liabilities. It's a meaningful number -- and so is the price-to-book valuation. For instance, when price-to-book is less than one, the company trades at less than the total value of its assets. Value investors love finding such companies. 

Let's Search For Some Cheap Growth Stocks
While we are not value investors, it's worth reviewing the P/B metric every now and then, and even screen for attractive stocks based on it. 

For today's consideration, I've selected a group of stocks that trade at relatively low valuations as measured by the P/B ratio. My initial criteria: stocks on the major U.S. exchanges with market capitalizations between $2 billion and $5 billion and trading with a P/B below 5. 

But we are "growth" investors, right? 

For the purpose of this screen, I selected only those companies that don't pay a dividend. Next step: companies with one-year revenue growth of 30% of higher. Almost by definition, high-growth stocks with attractive P/B valuations are rare -- only 16 companies have passed my test. 

Here are the smallest five of the group. With market caps of just over $2 billion, all of them are liquid enough. But are they truly good bargains? 

Let's take a look... 

MEDP logoMedpace Holdings (Nasdaq: MEDP) belongs to the so-called contract research organization (CRO) group. That is, it's a company where the research-intensive health care industries such as biotech, pharmaceutical and medical device outsource part of their research and clinical development tasks. 

Public since August 16, 2016, MEDP has outperformed the S&P 500 by a wide margin since then: up 89% versus the market's 32.5%. That's largely due to its business model, which is different from much of its CRP competitors in that MEDP does not just help with a task or two (as important or complex those might be), but takes on entire projects. 

MEDP is among my favorites of today's group -- the company is growing, it's profitable, and it's uniquely differentiated versus its peers. It's also now a bargain: year-to-date, it's lagging the market (up 4.7% versus the S&P 500's 15.2%). That's because back in February, the stock sold off some 22% in just one day on a worsening industry outlook as the company reported the fourth-quarter and 2018 full-year results on February 26. 

For instance, MEDP saw a cancellation rate in the fourth quarter that was roughly twice the run rate of the first three quarters of 2018; it also guided for lower margins in 2019 than last year. These factors, however, are now reflected in the price. Moreover, MEDP has since reported another quarter (the fiscal first quarter of 2019) -- during those three months, which were reported on April 20, despite a higher cancellation rate, revenues increased more than 23% over a year earlier, and adjusted per-share income reached $0.64, 16.4% higher than a year ago. 

A profitable and growing company -- and a member of the S&P 600 index to boot -- MEDP is the company to watch here. 

MYOK logoFounded in 2012 and public since October 2015, the target of MyoKardia (NYSE: MYOK) is heart disease. While its efforts are to concentrate on the treatment of heritable cardiomyopathies (genetically-driven forms of heart failure manifested in the thickening of the heart muscle), its ambition is to become the largest cardiovascular company in the world. That's a tall order, though. 

The shares, which are up some 350% since the IPO, have hit the pause button over the past year or so. But the stock is down only 5.4% year-to-date, despite the fact that early in January, its partner Sanofi (Nasdaq: SNY) announced that it was walking away from a heart drug disease pact with MyoKardia. On the other hand, the company has fully regained all the rights on its drugs. This may well prove to be a buying opportunity for this very interesting -- albeit risky -- biotech. 

PDC logoPDC Energy (Nasdaq: PDCE), an oil and gas exploration and production (E&P) company, is the cheapest on the list -- shares sell at only 0.91 times book value. The stock is down 45% in the past year, but is up some 8% year-to-date. Its valuations are attractive, and analysts -- 26 of them – on average rate it "outperform." 

Remember, though, that the price performance of E&P stocks is highly dependent on energy prices. This works both ways, of course, but it's a risk factor you should consider before taking a position. 

LGND logoUnlike many biotechs, Ligand Pharmaceuticals (Nasdaq: LGND) is highly profitable. Its business model is to conduct research -- but also to form partnerships with other companies to share costs and successes, and to license data and patents. It's growing at an annual pace in the mid-teens, profitable (in 2019 it's expected to earn $3.25 per share in profits) and has $1.4 billion in cash on the balance sheet. 

There is one drawback: it shares its successes. Unlike most of its peers, in which the sky is the limit for upside potential, LGND's careful partnership business model limits its upside exposure and future growth. 

QDEL logoIncorporated in 1979, Quidel (Nasdaq: QDEL) is a medical device company that develops, manufactures and markets rapid diagnostics, products that physicians and hospitals use to quickly and accurately identify a variety of viruses and conditions. Its portfolio includes rapid immunoassays, cardiac immunoassays, specialized diagnostic solutions and molecular diagnostic solutions. 

While this is a profitable company -- QDEL is likely to make $1.87 per share in 2019 -- going forward, analysts expect QDEL's profits to grow at a relatively slow pace for the next few years, thanks to growth in only the low-teens of its legacy systems. 

On the other hand, it is a well-established company with well-defined markets and steady revenue streams. I will continue watching this company for the potential of its new products and for the potential growth in the home self-testing business and for the potential of its relatively new cardiac business.

Action To Take
The prospect of having the best of both worlds (growth and value) rolled up into one stock may prove too good to pass up. But, as always, keep in mind that the investing ideas I present here are intended to provide a starting point for further research, not a final recommendation. 

I intend to keep close tabs on some of these stocks -- and they may become future additions to our Fast-Track Millionaire premium portfolio.

In the meantime, I invite you to check out my latest research...

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Genia Turanova does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.