As the S&P 500 races toward new highs, some investors see small-cap value stocks as the best bet for long-term growth amid growing concerns about index-based stock concentration. As mega-caps like Nvidia (NASDAQ:NVDA) disproportionately drive the S&P 500’s performance, the index becomes more vulnerable to fluctuations—a few missteps could significantly impact your entire portfolio.
In contrast, small-cap value stocks offer distinct advantages. They are small and nimble enough to adapt to changing conditions and offer long-term growth potential. Their value-oriented nature helps preserve capital, often providing solid income and dividends alongside steady upward momentum.
These stocks combine these qualities, making them excellent options for diversifying risks away from the few dominant ‘Magnificent 7’ stocks that could otherwise dictate the fate of your portfolio.
Apartment Income REIT (AIRC)
Higher interest rates usually suppress the new mortgage market and elevate rent levels in response to inflation, underscoring the robustness of small-cap value stock Apartment Income REIT (NYSE:AIRC) in a high-interest-rate environment.
Over the past decade, Apartment Income has strategically honed its multifamily building portfolio, focusing on high-demand properties in urban areas with strong demographic growth. This approach secured consistently high occupancy rates and regular rent increases. Future demand for Apartment Income properties is likely to be driven by job and income growth, decreasing homeownership rates and the enduring appeal of urban living — all factors that intensify with rising interest rates.
Apartment Income REIT carefully refined its portfolio and operational strategy, reducing its property holdings from 300 in 2008 to 75 today while maintaining a strong presence in key markets. This strategic shift highlights savvy management choices prioritizing quality and operational efficiency in preferred locations over mere expansion. By moving away from lower-growth regions, AIRC has enhanced its growth potential and fortified its resilience against interest rate fluctuations.
Apartment Income offers a 4.6% forward yield and a robust option for diversification among small-cap value stocks, maintaining strength even amid economic uncertainties.
Cricut (CRCT)
Crafty folk and DIY creatives love Cricut (NASDAQ:CRCT), but that doesn’t mean the small-cap value stock gets the love it should from investors. Though revenue slid slightly in its most recent earnings report, the company still offers investors a 1.83% trailing yield. It stands to gain from improving consumer sentiment, particularly as buyers seek stay-at-home activities to save money and maintain household budget management.
Overall sales dropped 8% in 2024 first quarter, though offset slightly by higher paid subscriber rates and higher machine sales — meaning more people began their Cricut journey over the past few months, and investors can expect a commensurate sales bump moving forward as new users restock and replenish crafting supplies.
If you’re interested in buying into Cricut, now is the time. Management announced a special one-time dividend of $0.40 in the earnings report. Shareholders of record as of July 2nd will get the sizable distribution on July 19th, so there’s still time to snag a piece of the action.
Medifast (MED)
Medifast (NYSE:MED) hasn’t yet caught the wider weight loss wave affecting many pharma stocks. However, that doesn’t mean there isn’t a long-term opportunity for the nutrition and weight loss company to sell products across a range of platforms, including multi-level marketing.
The company’s first-quarter earnings report included a hefty $0.76 earnings per share. At the same time, its balance sheet boasts a respectable $150 million cash reserve with zero debt (important in today’s high-rate environment). Executives are also fighting to differentiate themselves from larger weight loss competitors.
They are angling for a more comprehensive and holistic approach to customer management, including guided habit development and bespoke coaching. To that end, management told investors to expect that “2024 will be a year of investment for future growth.” Though that may mean its 20% dividend yield won’t hold, it doesn’t detract from the company’s long-term upside potential.
Connexa Sports Technologies (YYAI)
Connexa Sports Technologies (NASDAQ:YYAI) is one of those deep-value stocks that seem to be amid a resurgence despite trading at a bottom-barrel 0.05x sales. Connexa targets specific sports, such as the increasingly popular pickleball in the U.S., padel in Mexico and perennially favored tennis, with a range of unique sports equipment storage products.
A targeted approach helps Connexa to engage directly with consumers through high-quality advertising campaigns, ensuring product longevity and market growth. These style strategies position Connexa as a promising small-cap value stock, particularly as enthusiasm for outdoor sports increases during the spring and summer months.
In 2023, Connexa warred with short sellers, who drove its share price down by over 70%, leading to a reverse stock split. However, the tides shifted for the small-cap value stock after new strategic investors came on board, boosting the stock’s value by over 260% since January. This remarkable turnaround signals strong momentum for Connexa’s future, especially as the summer sports season approaches and more consumers gear up for outdoor activities.
Garrett Motion (GTX)
Garrett Motion (NASDAQ:GTX) brings major benefits to the small-cap value stock table: it trades at just 7x earnings and 0.5x sales while remaining an overlooked player within the green tech and sustainable driving sector. The company manufactures a range of automotive parts that enhance emission reductions and support zero-emission technologies, including alternative fuel engines and turbochargers for gasoline and diesel vehicles.
Though “pure” EV companies like Tesla (NASDAQ:TSLA) are currently losing favor due to declining consumer interest, as shown by the surge in hybrid and gasoline vehicle sales, Garrett Motion serves as a bridge for investors seeking long-term sustainability but recognizing that global EV adoption remains a long-term goal.
The recent dip in Garrett Motion’s stock followed an earnings report that showed a 6% drop in quarterly sales; however, its annual sales were stable, and the company maintained healthy margins and free cash flow. This stock is underappreciated and undervalued as investors chase more conspicuous growth opportunities. Still, as automakers revise their EV planning timelines, expect Garret Motion to become a major small-cap value stock in tomorrow’s market.
Costamare (CMRE)
Even as challenges in seafaring shipping put competitor transport stocks at risk, containership chartering company Costamare (NYSE:CMRE) remains a robust and accurate small-cap value stock, trading at just 0.6x book value and 6x earnings. Unfortunately, you’ll need a little patience if you plan to wait for the company to return to past strength. Although global freight and charter prices spiked in early 2024, Costamare’s status as a non-operating owner means its fleet is more than 87% booked for the remainder of the year, often at less-than-ideal pricing.
Still, Costamare’s management is adeptly adjusting operations, divesting smaller ships while acquiring larger vessels to enhance cost efficiency amid increasingly unpredictable naval transport due to geopolitical tensions.
Honestly, Costamare is an attractive buy at these levels, but investors should brace for a gradual build in upward momentum before the stock truly sets sail. In the meantime, Costamare’s healthy 6% total yield — split between buybacks and distributions — should satisfy shareholders in the short term.
Steelcase (SCS)
High-end home office and corporate furniture manufacturer Steelcase (NYSE:SCS) is an under-the-radar small-cap stock that offers stability and upside potential as the company adapts to changing conditions. The company has adeptly navigated the shift towards work-from-home trends post-pandemic and is poised to continue innovating in the face of economic challenges.
Steelcase rapidly regained financial stability following pandemic-related challenges. Its latest quarterly earnings report revealed a net income of $30.8 million, more than double the previous year’s. Furthermore, the company has maintained steady sales of around $800 million over the past five quarters, showcasing its ability to enhance margins without sacrificing quality.
In response to the continued shift toward remote work, Steelcase aims for 5-7% annual sales growth and a 5% free cash flow margin as a percentage of revenue over the next five years. Additionally, the company has significantly cut its debt to better cope with the higher interest rate environment, thereby boosting liquidity and reducing interest costs. These strategic efforts position Steelcase as a top small-cap value stock today.
On the date of publication, Jeremy Flint held no positions in the securities mentioned. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.