Here are five small-cap value names to look at in 2024
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Small caps have begun to pick up in recent weeks — and Wall Street believes this outperformance could continue in 2024. The Russell 2000 is up more than 10% in December, bringing its year-to-date gain to 13%. This marks a dramatic turnaround from when the small-cap benchmark turned negative for the year in early October. With lower rates in 2024 looking likely after the Federal Reserve indicated three cuts to come at its latest policy meeting, sentiment around the small-cap sector has become increasingly optimistic. Jay Hatfield, CEO of Infrastructure Capital Advisors, thinks that small cap value stocks are trading at historically low prices, creating a prime entry opportunity for investors that could pay off next year. Take a look at five of Hatfield’s small cap value picks below, which all contain low multiples and high dividend yields. The stocks are listed from most to least interest rate sensitivity, per Hatfield. East West Bancorp California-based East West Bancorp , which has a specialty in retail and commercial banking toward Chinese markets, is one of Hatfield’s five picks. The bank has a market cap of nearly $10 billion and a yield of 2.7%, which Hatfield said “is not super high, but substantially above the S & P 500.” The bank’s focus on China gives it a strategic advantage over other banks in the region, particularly in terms of client relations, Hatfield said. To be sure, geopolitical tensions between the U.S. and China have caused the stock to trade somewhat “cheaply,” although the bank’s operations are mostly in the U.S., he added. “That’s clearly a risk, [but] I would argue that that’s also an upside. There’s a movement, at least with this administration, to try to cool tensions,” said Hatfield. Shares of East West Bancorp are up more than 7% in 2023. The stock is trading at nine times the next 12 months’ earnings. Kilroy Realty Hatfield’s second pick, Kilroy Realty , is admittedly a “controversial” choice, according to the investor. However, he views two catalysts ahead for the real estate investment trust. “People just become way too negative about Office REITs. We think that there will continue to be a portion of workers who work remotely, but the office is not dead in our opinion,” Hatfield said. Lower rates in 2024 will also be a catalyst, he added. The investor also thinks that artificial intelligence startups have sparked a “live from office” trend. This entails having worker storage and amenities to facilitate close to 24 hours in the office compared to eight hours — which is helpful in an “all hands on deck” environment like startups, Hatfield added. AI companies have already absorbed extra space in tech centers such as San Francisco and Boston, areas in which Kilroy has exposure, he said. “It’s a bet that AI doesn’t just benefit the tech sector, but also provides absorption of office space,” said Hatfield. “It’s controversial.” Kilroy has a market cap of around $4.8 billion. The stock offers a dividend yield of 5.3% and trades at a 9.3 times funds from operations ratio. Shares are up 5% year to date. AES Utility and renewable energy company AES is another interest-rate sensitive company that was heavily sold off in 2023. Utilities suffered collectively as high interest rates made it costly for them to refinance debt, and their dividends appeared less attractive compared to Treasurys. Shares of AES are off about 35% this year, but Hatfield thinks the stock is due for a bounce in 2024. “AES has a tremendous backlog of renewables development [and] has some high quality U.S. utilities,” noted Hatfield. The stock is trading at around a 3.6% dividend yield and only 10 times its 2024 earnings. AES has a market cap of $12.6 billion. Plains GP Holdings Midstream energy infrastructure company Plains GP Holdings has a market cap of just $3.1 billion. The stock has a dividend yield of 6.8%, and it’s trading at roughly 10 times its 2024 earnings. Natural gas prices in the U.S. are currently around 80% lower than the rest of the world, which is “a great tailwind for all midstream companies,” Hatfield said. “The catalyst there is that they are big players in the natural gas segments, and they are expanding that.” Shares have gained 27% year to date. Bloomin’ Brands Casual dining restaurant company Bloomin’ Brands was Hatfield’s final pick. Bloomin’ Brands is the parent company of Outback Steakhouse and other restaurant chains. Along with other small-cap names, Hatfield said the stock is currently depressed, trading at 10 times its 2024 earnings. Bloomin’ Brands has a dividend yield of 3.6%. 2024 won’t necessarily be “the year of dining,” Hatfield said. However, he thinks activist investor Starboard Value, which disclosed its 9.9% stake in the company in August, could generate a catalyst. A share repurchasing program or even a sale of the company could be some of the ways the activist investor creates momentum for the stock, per Hatfield. “It’s very cheap, way cheaper than its peers for no particular reason other than probably it’s a small cap,” said Hatfield. The investor said he’s not overly concerned about a turndown in for the health of the consumer next year, which tends to negatively affect restaurants and other consumer discretionary names. “We’re more bullish than most about the US consumer, and think that any concerns are more than priced-in when you’re getting a company with a good track record of growth, at a hugely discounted value, and a nice dividend yield,” Hatfield said. “We do believe that if you’re gonna invest in value stocks, they should get paid while you wait.” Bloomin’ Brands has a market cap of $2.3 billion. Shares have jumped 32% in 2023.
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