One of the more fun assignments at InvestorPlace is selecting the top small-cap stock picks for 2023. In this case, I’ve been chosen to provide readers with seven options for next year.
While I’ve already admitted that picking stocks for the year ahead is always fun, that doesn’t make it easy. The temptation is to focus on high-growth businesses whose products are flying off the shelves.
However, given a recession is looking more likely next year, one needs to temper their enthusiasm.
To accommodate a certain amount of caution, I‘ve screened for small-cap stocks — $500 million to $5 billion market capitalization — that have a high return on assets and low net debt.
To me, it’s a good combination of offense and defense, ensuring that readers have some downside protection, while providing decent growth and profitability that investors might expect from smaller companies.
Without further delay, here are our top small-cap stocks of 2023.
|KLIC||Kulicke and Soffa Industries||$47.07|
|HCC||Warrior Met Coal||$34.54|
|MMI||Marcus & Millichap||$34.90|
Cavco Industries (CVCO)
Cavco Industries (NASDAQ:CVCO) is an Arizona-based manufacturer of manufactured homes, modular homes, commercial buildings, park model RVs and vacation cabins. It sells its products through 28 different homebuilding production lines across the U.S.
CVCO stock hasn’t done well in 2022. It’s down more than 20% year-to-date.
In October, Cavco announced the acquisition of Oklahoma-based Soltaire Homes, a manufacturer and retailer of manufactured homes from facilities in Oklahoma, New Mexico and Mexico. It retails its products from 24 retail locations in Oklahoma, New Mexico and Texas. Cavco paid $93 million for Soltaire, which built nearly 1,600 homes in calendar 2021.
The acquisition expands the company’s coverage of the Southwest region. It also allows them to manufacture in Mexico for the first time.
In Q2 2022, it increased its sales by 60.6% due to higher volumes and selling prices. It finished the quarter with a backlog of $651 million, $347 million lower than in Q1 2022. Despite a recession on the horizon, the company feels it can meet the needs of consumers looking for better value in their housing.
Its profit during the quarter was $8.25 a share, up from $4.06 a year earlier.
There are only three analysts that cover its stock. All three rate it a buy with a $341.67 target price, 30% higher than where it’s currently trading.
Cal-Maine Foods (CALM)
Cal-Maine Foods (NASDAQ:CALM) stock finally bottomed in late 2021. Since then, its share price has been on fire, up more than 56% YTD. The company’s first extended run began in March 2009, when it traded under $10. By October 2015, it was trading above $60. It then fell to $35 over a few more years.
While it’s hard to know if the Mississippi egg producer is in the early stages of an extended run higher, there is no question that its business is benefiting from inflation and the shortage of eggs due to avian flu. In mid-September, a dozen grade A large eggs wholesale was $2.34, almost double the five-year average.
Cal-Maine named company veteran Sherman Miller as its CEO in September, replacing Dolph Baker, who will retain his chairman’s role. Miller joined Cal-Maine in 1996, so he knows the business inside and out, allowing him to hit the ground running.
Due to higher egg prices, it reported record quarterly sales in Q1 2023, up 103% to $658.3 million. The net average selling price in Q1 2023 was $2.28 a dozen, up from $1.24 a year earlier. It sold 275.3 million dozen eggs in the quarter, up from 254.6 million a year earlier.
As a result of its record sales, its net income in the first quarter was $125.3 million, considerably better than its $18.0 million loss in Q1 2022.
The company continues to invest in the production of cage-free eggs. That should help it to continue growing with or without higher egg prices.
Dynavax Technologies (DVAX)
Dynavax Technologies (NASDAQ:DVAX) is one of three under-the-radar stocks I recommended in October. The stock is a double-edged sword. While it is on track for a second straight year making money, it generates a majority of its revenue from two commercial products, one of which could experience a significant sales slowdown when, or if, Covid-19 disappears.
The company’s HEPLISAV-B vaccine helps adults 18 and older avoid contracting Hepatitis B. The second product, CpG 1018, when added to Covid-19 vaccines, helps boost the immune response of patients.
For the full year in 2022, Dynavax expects to generate between $550 million and $600 million in revenue from CpG 1018 with a 60% gross margin. In the third quarter, CpG 1018 revenue was 50% higher than a year earlier, accounting for 75% of its $167.7 million revenue. HEPLISAV-B revenues grew 65% year-over-year to $37.5 million.
Its GAAP net income for the first nine months was $225.4 million, up from a loss of $23.1 million a year earlier.
To ensure it continues to generate revenue from CpG 1018, it is working on a pipeline of candidates to leverage the adjuvant. Currently, three are in Phase 1 or Phase 2 clinical trials.
Over time, it should prove to investors that it’s more than a one-trick pony.
Encore Wire (WIRE)
If you were one of the lucky investors to buy Encore Wire (NASDAQ:WIRE) during the March 2020 correction, you’re up more than 263% over 34 months.
The Texas-based company is a leading manufacturer of copper and aluminum residential, commercial and industrial building wire. That wasn’t always the case. It started out in 1989 in a 68,000-square-foot industrial warehouse. Today, it has over three million square feet spread across 450 acres.
For the nine months ended Sept. 30, its sales were $2.32 billion, 22% higher than in the same period in 2021. Its net income was $563.8 million, 41% higher than a year ago. A big reason for the big jump in net income was a 400 basis-point increase in its gross margin. It finished the third quarter with $574 million in cash and zero debt on its balance sheet.
“We continue to believe Encore Wire remains well positioned to capture market share and incremental growth in the current economic environment,” Encore stated in its Q3 2022 press release. “As we address the near-term challenges, we remain focused on the long-term opportunities for our business including improving our position as a sustainable and environmentally responsible company in our industry.”
While it’s come a long way in recent years, it’s only just getting started.
Kulicke and Soffa Industries (KLIC)
Kulicke and Soffa Industries (NASDAQ:KLIC) sounds like the name of a furniture manufacturer. Alas, that’s not the case.
Instead, it designs and manufactures capital equipment and tools to assemble semiconductor devices. Its products include ball bonders, wafer-level bonders, advanced packaging and many other products for the semiconductor industry.
If any industry is shrouded in mystery, my vote goes to semiconductor companies. Every public company’s overview page sounds like gobbledy gook to me. But that’s my problem, not theirs.
K&S has been in business for 71 years. Today, it generates $1.5 billion in sales, a nearly 50% gross margin and a non-GAAP net income of $456 million. The company’s non-GAAP free cash flow for the 12 months ended Oct. 1 was $367 million, or 13.6% of its $2.7 billion market cap. I consider anything above 8% to be in value territory.
Over the past four fiscal years, the company has invested in its business — both organically and through acquisitions — resulting in a served available market of $4.7 billion, 51% higher than in 2018.
As of Oct. 1, it had cash and short-term investments of $776 million, no long-term debt, and $4.1 million in operating lease liabilities, good for net cash of $735 million.
It might be facing headwinds at the moment, like virtually every company in the semiconductor industry, but it’s positioned its business for growth.
Warrior Met Coal (HCC)
In mid-October, I recommended Alpha Metallurgical Resources (NYSE:AMR), a slightly larger competitor by market cap to Warrior Met Coal (NYSE:HCC). Warrior, based in Alabama, is a low-cost producer of non-thermal metallurgical (met) coal used for steel production.
The HCC stock symbol refers to hard coking coal, another name for met coal. Like Alpha, its business is booming. In Q3 2022, its sales were $372 million, 86.2% higher than a year ago, with $98.4 million in net income, 156% higher than Q3 2021.
Its free cash flow for the first nine months was $491 million, almost 4x higher than a year ago. Its trailing 12-month free cash flow is $674 million [key ratios], good for a 35.9% free cash flow yield. It’s off-the-charts cheap right now.
The company is doing so well that it’s facing a major backlash from the miners, whose hard work delivers its impressive profits. In April 2021, 900 miners went on strike at the company’s Brookwood mines in Alabama — the site of a major disaster in 2001 that saw 13 miners die — and 500 remain on strike as of Dec. 5.
The miners are on strike because they want the company to restore pay and benefits taken away in 2016 to save money and keep the mines operating. The company argues that the average hourly employee earns $97,000, putting them in the top 10% of Alabama wage earners.
Coal mining is a nasty business.
While I think both stocks are worth owning for a specific type of investor, I couldn’t own either because of the dangers miners continue to face to produce these profits. Eventually, the company has to cave.
Shareholders will be just fine despite higher wages.
Marcus & Millichap (MMI)
Marcus & Millichap (NYSE:MMI) made my November list of stocks to buy now. I like it because of its work in the private-client commercial real estate market and its position to grab a more significant share.
The private-client market — defined as real estate properties between $1 million and $10 million — generates 58% of the real estate broker’s commissions and 80% of its commercial property sales transactions.
Like many real estate-focused businesses, higher interest rates combined with a looming recession have slowed the company’s revenue generation.
In the third quarter, Marcus & Millichap’s revenue was $323.8 million, down slightly from $332.4 million a year ago. On the bright side, its revenue for the first nine months of 2022 was 29.7% higher, to $1.0 billion. On the bottom line, its earnings per share for the first nine months was $2.39, 19.5% higher than in 2021.
While the private-client market is important, it’s been doing a good job growing its middle market and larger transaction market businesses. Revenues were up 53% in the first nine months to $378.3 million.
An example of the company’s work is the recent sale of Liv Crossroads, a 356-unit multifamily property in Arizona, for $116 million, or $325,843 per unit. Sold by its Institutional Property Advisors division, the property was only completed in early 2022.
It’s a small-cap diamond in the rough.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.