Yesterday, Federal Reserve Chair Jerome Powell hinted that interest rate cuts might be on the horizon as early as September, provided the U.S. economy stays on its anticipated path. That's good news for small-cap stocks, which benefit from lower interest rates due to higher borrowing costs.
Investors looking to capitalize on the potential upswing could consider investing in these small-cap companies with big upside potential, such as NewLake Capital Partners, Inc. (NLCP), Immersion Corporation (IMMR), and Power Solutions International, Inc. (PSIX).
Just a few weeks ago, the June consumer price index (CPI) report indicated easing inflation, sparking a rotation from large-cap to small-cap stocks. The benchmark small-cap Russell 2000 Index has now gained more than 11% year-to-date, reflecting growing investor confidence in the sector.
Small-cap stocks offer diverse exposure and significant upside potential. With market capitalizations ranging from $250 million to around $2 billion, these companies often have more room to grow than their large-cap counterparts. They are frequently in the early stages of development or occupy niche segments within their industries.
Moreover, Powell's comments on Wednesday affirmed investors' expectations that the Federal Reserve will shift from its restrictive interest rate policies to a more accommodating stance by September. This pivot is expected to help bring inflation down to the target 2% level without significantly harming the labor market.
Such a shift would be a boon for small-cap stocks, which typically thrive when borrowing costs are lower, leading to reduced operational expenses and improved earnings.
With that in mind, let’s dig deeper into the fundamentals of the above-mentioned small-cap stocks in detail:
NewLake Capital Partners, Inc. (NLCP)
NLCP, with a market cap of $417.46 million, is an internally managed real estate investment trust that provides real estate capital to state-licensed cannabis operators through sale-leaseback transactions, third-party purchases, and funding for build-to-suit projects.
On July 15, the company paid its shareholders a quarterly dividend of $0.43 per share, reflecting a 4.9% increase from the previous quarter. NLCP pays a $1.72 per share dividend annually, translating to an 8.60% yield on the current share price. Its four-year dividend yield is 7.31%.
On May 8, NLCP announced the acquisition of a 58,500-square-foot industrial property located in East Hartford, Connecticut. The company has signed a long-term triple net lease with an affiliate of C3 industries Inc, a prominent multi-state cannabis company based in Ann Arbor, Michigan.
NLCP's total investment amounts to $16 million, which includes a $4 million purchase price and a $12 million construction allowance to retrofit the former cold storage facility. This investment supports the expansion of C3’s vertically integrated cannabis operations in Connecticut, addressing the current product shortage in the state.
NLCP’s total revenues for the first quarter ended March 31, 2024, increased 10.4% year-over-year to $12.61 million. Its income from operations rose 19.4% from the year-ago value to $6.98 million. The company’s net income grew 17.1% year-over-year to $6.99 million, while its net income attributable to common stockholders per share increased 22.2% year-over-year to $0.33.
In addition, NLCP’s attributable AFFO stood at $10.96 million or 0.52 per share, reflecting an increase of 10.6% and 15.6% from the prior-year quarter, respectively.
Street expects NLCP’s FFO for the second quarter (ended June 2024) to increase 13.6% year-over-year to $0.50. Its revenue for the same quarter is expected to grow by 10.8% year-over-year to $12.60 million. Moreover, NLCP surpassed the consensus revenue estimates in three of the trailing four quarters, which is impressive.
Over the past three years, NLCP’s revenue has increased at a CAGR of 51.1%, and its total assets have grown at a 6.9% CAGR.
NLCP shares have gained 59% over the past nine months and 24.9% year-to-date to close the last trading session at $19.99.
NLCP’s POWR Ratings reflect its robust outlook. The stock has an overall rating of A, which translates to a Strong Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
NLCP also has an A grade for Sentiment and a B for Momentum, Stability, and Quality. It is ranked first out of 44 stocks in the Real Estate Services industry. Click here to see NLCP’s Growth and Value ratings.
Immersion Corporation (IMMR)
With a market cap of $406.79 million, IMMR creates, designs, develops, and licenses haptic technologies that allow people to use their sense of touch to engage with and experience various digital products in North America, Europe, and Asia. The company provides technology, patent, and combined licenses.
For the first quarter that ended March 31, 2024, IMMR’s total revenues increased to $43.85 million from $7.07 million recorded in the prior-year quarter. Its operating income improved considerably from the year-ago value of $3.23 million to $16.61 million.
The company’s non-GAAP net income stood at $130.70 million or $0.63 per share, indicating an increase of 108.4% and 117.2% year-over-year, respectively. Also, its cash and cash equivalents stood at $91.09 million as of March 31, 2024, compared to $56.07 million as of December 31, 2023.
Analysts expect IMMR’s revenue for the second quarter (ended June 2024) to increase 5.9% year-over-year to $7.40 million, while its EPS for the same period is expected to be $0.17. IMMR has a promising surprise history, having topped consensus revenue and EPS estimates in three of the trailing four quarters.
IMMR’s revenue and EBITDA have grown at CAGRs of 31.1% and 45.4%, respectively, over the past three years. In addition, its levered FCF has increased at a CAGR of 42.7% over the same time frame.
Over the past nine months, the stock has surged 99.8% to close the last trading session at $12.77.
IMMR’s bright prospects are reflected in its POWR Ratings. The stock has an overall rating of B, which translates to Buy in our proprietary rating system.
It has an A grade for Quality and a B for Growth. Out of 134 stocks in the Software - Application industry, it is ranked #29. Click here to see additional ratings for IMMR (Value, Momentum, Stability, and Sentiment).
Power Solutions International, Inc. (PSIX)
PSIX designs and manufactures advanced, emission-certified engines and power systems powered by clean fuels like natural gas, propane, biofuel, gasoline, and diesel. Its products are primarily used by global original equipment manufacturers (OEMs) and direct end-user clients across power systems, industrial, and transportation markets. The company has a market cap of $310.17 million.
On April 2, PSIX unveiled its new website, which features a refreshed modern design and user-friendly navigation. Visitors can easily access information about our company, its services, and a full range of engine and power systems products. The site makes it simple for OEMs, dealers, systems integrators, and other customers to locate the engines they need.
In the first quarter that ended March 31, 2024, PSIX’s net sales amounted to $95.24 million, while its gross profit increased 10% year-over-year to $25.76 million. Its operating income came in at $10.66 million, reflecting a 25% increase from the year-ago period.
The company’s adjusted net income stood at $7.04 million, up 84.7% year-over-year, while its non-GAAP net income per share for the quarter improved by 93.8% from the year-ago value to $0.31. In addition, PSIX’s adjusted EBITDA increased 18.4% year-over-year to $11.91 million.
The consensus revenue estimate of $128.50 million for the fiscal third quarter (ending September 2024) represents a 10.9% increase year-over-year. The consensus EPS estimate of $0.54 for the current quarter indicates a 38.5% improvement year-over-year. The company has an excellent earnings surprise history; it surpassed the consensus EPS estimates in each of the trailing four quarters.
Over the past three years, PSIX’s revenue and total assets have increased at CAGRs of 2% and 0.9%, respectively.
PSIX’s stock has gained 112.1% over the past month and 419.2% over the past year to close the last trading session at $13.50.
It’s no surprise that PSIX has an overall rating of A, which equates to Strong Buy in our proprietary rating system. It also has an A grade for Value and Sentiment. Among 52 stocks in the Auto & Vehicle Manufacturers industry, PSIX is ranked #2.
In addition to the POWR Ratings we’ve stated above, we have also rated PSIX for Growth, Momentum, Stability, and Quality. Get all PSIX ratings here.
What To Do Next?
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NLCP shares were unchanged in premarket trading Thursday. Year-to-date, NLCP has gained 24.86%, versus a 16.62% rise in the benchmark S&P 500 index during the same period.
About the Author: Shweta Kumari
Shweta's profound interest in financial research and quantitative analysis led her to pursue a career as an investment analyst. She uses her knowledge to help retail investors make educated investment decisions.
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