To say the financial markets are undergoing a fit would be an understatement.
As you know, stocks soared in the three months that followed Donald Trump’s surprise victory.
And the rally was led by stocks that had previously been laggards: financials, industrials and materials.
Yet the epic failure of the Trump administration to repeal and replace Obamacare looms large in the minds of investors.
In particular, they’re doubting the president’s ability to advance his agenda through a bitterly divided Congress. As a result, all three sectors that led the markets after the election have seen notable declines recently.
But a new opportunity has just emerged…
In fact, the stock market’s sleepiest sector just transformed into a red-hot momentum trade as investors flock to “safety.”
And as senior analyst Jonathan Rodriguez writes below, one tiny firm is leading the safety trade rally…
Ahead of the tape,
Sleepy Small Cap About to Ignite
There’s no question that a major driver of the latest leg up for the stock market is President Trump.
His campaign promises — like deregulating the banking and energy sectors, boosting infrastructure spending and renegotiating trade deals — had investors salivating in late 2016.
Yet save for a flurry of executive orders and a hard-fought confirmation of a Supreme Court justice, he hasn’t been able to do much.
And the shine of the Trump trade has faded fast.
This is no more evident than in the realm of small-cap stocks. These equities tend to rise with increased investor confidence, and fall as it wanes.
The Russell 2000, which rallied as much as 18% after the election and gained twice as much as the S&P 500, has declined just over 1% in the last month.
But while the so-called “risk-on” trade is fading, an equally profitable “risk off” has emerged.
Let me explain…
Sentiment-driven stock rallies are often led by the market’s smallest, most volatile stocks: energy, materials and tech names.
And while investors flock to these risk-on trades, they tend to shed “defensive” stocks. That is, low-growth stocks with consistent cash flows and dividends. Think consumer staples, telecoms and utilities.
But the opposite is also true.
As investors de-risk, they load up on “safe” defensive stocks.
And thanks to the broad sell-off in stocks, the smallest issues — which fell the furthest — are now among the market’s cheapest names.
Here’s one such name perfectly positioned to profit from the safety trade…
The Spark That Grew Into a Mighty Blaze
Spark Energy Inc (NASDAQ:SPKE) is an electric utility company based in Houston, Texas.
The company offers its natural gas and electricity services as an alternative choice in 90 territories across 18 states.
Boasting a market cap of just $630 million, Spark has plenty of room to grow in this new, fragmented market.
Since going public in 2014, the company has grown earnings per share by 33% — besting the electric utility industry by four times.
In just the fourth quarter, earnings rose 93% from the previous year.
Fourth-quarter sales also grew 52% from the same period last year, to $547 million.
Spark trades at 16.3 times forward earnings — a 15% discount to the Russell 2000 and 26% below the industry.
The company also sports a forward enterprise value-to-sales multiple of 1.0 — a 78% discount to the industry.
Free cash flow (FCF) — a key balance sheet item watched by income investors — rose 48% from last year, to $66 million. And the company’s dividend payments account for just 36% of FCF. As you may know, payout ratios from FCF below 50% indicate a rock-solid dividend.
Speaking of dividends, shares also yield 4%. That’s a 65% premium to the S&P 500 and nearly twice what the U.S. 10-year Treasury now pays investors.
Over the last year, the stock has surged 58% on the firm’s strengthening fundamentals — outperforming the broader small-cap utility sector by more than three times.
Better still, if the Federal Reserve proves slower to raise rates than expected, the stock could see even heavier inflows from income-starved investors.
Bottom line: Utility stocks are soaring as investors reach for safety — with small caps leading the way. And Spark could see the greatest gains of the safety trade targets.
On the hunt,