Could These Be The Hottest Stocks Of 2018?

• (0:15) - Small Cap Value Stocks
• (2:20) - iShares and Vanguard Small Cap Value ETFs
• (5:30) - Zacks Stock Screener
• (7:15) - Tracey's Top Stock Picks
• (13:10) - Episode Roundup: Podcast@Zacks.com

Welcome to Episode #70 of the Value Investor Podcast

Every week, Tracey Ryniec, the editor of Zacks Value Investor portfolio service, shares some of her top value investing tips and stock picks.

There’s no denying that 2017 was the year of the big caps, especially technology stocks and the FANG names. Nothing stopped them as they powered to record highs, taking the NASDAQ with them.

But in the last 3 months, there’s been a shift in the wind. The small cap stocks have, surprisingly, outperformed, rising 11% while the S&P 500 gained just 7.5%.

Could the story be changing?

The Contrarian Play: Small Cap Value Stocks

Small cap growth was the driver behind most of those gains over the last 3 months. The Vanguard Small Cap Growth ETF is up 18% year-to-date versus just 5.5% for the Vanguard Small Cap Value ETF VBR.

Similarly, the iShares Russell 2000 Growth ETF has jumped 20.5% while the iShares Russell 2000 Value ETF IWN has gained just 6%.

Value continues to trail growth in small, mid and large caps stocks.

But historically, small cap value stocks are the best performing segment of the stock market.

2017’s continued weakness could be a buying opportunity for value investors.

Screening for Small Cap Value Stocks

Tracey ran a screen to find companies with a market cap under $1.5 billion, with a Zacks Rank of #1 (Strong Buy), #2 (Buy) or #3 (Hold) which were still cheap.

She looked for forward P/Es under 15 and PEG ratios under 1.0, so that there was also some growth.

Even with these narrow parameters, there were still 40 companies that met the criteria.

Tracey narrowed it down to three companies that had intriguing stories.

3 Cheap Small Cap Stocks

1. Ultra Clean Holdings, Inc. (NASDAQ:UCTT) has a market cap of $815 million. Earnings are expected to soar 260% in 2017. It’s in the hot semiconductor sector but it’s still cheap, with a forward P/E of 10.4.

2. Francesca’s Holdings Corporation (NASDAQ:FRAN) is small, with a market cap of just $257 million. This women’s specialty retailer saw some rough times recently, as earnings are expected to drop 31% this year. But is the worst over for the apparel retailers? Earnings are expected to rebound 7% in 2018. It’s trading with a forward P/E of just 9.4.

3. Smart Global Holdings (NASDAQ:SGH) specializes in memory, storage and solutions for the electronics industry. On Nov 15, it pre-announced stronger than expected earnings which were at the high end of prior guidance. It has a market cap of just $800 million and is trading with a PEG ratio of just 0.7.

Remember, with small cap companies, there are fewer analysts covering them so there is not as much information readily available. Investors really have to do their homework.

What else should you know about small cap value stocks for 2018?

Listen to this week’s podcast to find out.

[In full disclosure, the author of this article owns shares of VBR in her personal portfolio.]

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