Small-cap stocks are coming into their own again. After a year when the biggest, most high-profile tech stocks carried the indexes to new heights, we’re seeing the tiny acorns putting down roots, such as with these S&P 600 stocks to buy.
Over the past three months the small-cap stock index offered investors total returns that surpassed those of large-cap stocks. Don’t be surprised. Historically speaking, small-cap stocks handily outperform mid- and large-cap stocks. Investing in Small Cap Stocks authors Christopher Graja and Elizabeth Ungar found that over the 75 years studied, small-cap stocks beat mid-cap and large-cap stocks 60% of the time.
With inflation subsiding and interest rate cuts on the table, small-cap stocks may be entering a period of outperformance again. What follows are three S&P 600 stocks to buy for superior returns for years to come.
e.l.f. Beauty (ELF)
Make no mistake, e.l.f. Beauty (NYSE:ELF) isn’t a laggard. ELF stock is up 174% over the past year and kicked off 2024 with a 14% gain so far. But there’s good reason to believe this isn’t the end. More good times are coming.
Sales at the fast-growing cosmetics company are accelerating, growing over 75% for each of the past three quarters. In the fiscal second quarter that ended September 30, e.l.f. also gained 330 basis points of market share. It is the 19th consecutive quarter it grew both sales and share. That’s almost five straight years. In that time, ELF stock has returned more than 1,800% for investors compared to a double by the S&P 500 and 51% by its own S&P 600 index.
Moreover, where e.l.f. earnings grew 10% annually over the last five years Wall Street now predicts the cosmetics stock will see them surge at a 33% compounded annual growth rate. Earnings tend to follow sales and stock price tends to follow earnings. Yet even with the growth it’s seen, e.l.f. Beauty still trades at just twice sales. It’s not a cheap stock but well worth the premium its charging.
Powell Industries (POWL)
If you thought the cosmetics company was doing well then you’ll be surprised to learn Powell Industries (NASDAQ:POWL) is doing even better. It’s stock more than tripled in value over the past year as sales of heavy equipment to the energy industry took off. Powell makes electrical systems for petroleum, oil and gas producers, refineries, liquefied natural gas (LNG) facilities and utilities. It just reported earnings the other day where sales jumped 53% as its backlog of orders doubled from the year-ago period.
Powell hasn’t had the same sort of knock-your-sock-off returns as e.l.f. over in the past half-decade, but total returns grew 250% in that period. It’s paid a dividend for nearly 30 years and has raised it several times. The other day it increased it again for the second time in two years to $0.265 per share. The dividend yields 1.3% annually.
Now there may be a hiccup on the horizon after President Biden froze approvals for LNG exports to Europe and Asia. At a time when Europe is dependent on U.S. LNG because of the war in Ukraine, the halt on exports seems misguided and ill-timed. LNG projects have figured large in Powell’s backlog of orders.
But recovery in all of its primary end markets have bolstered Powell’s growth and could more than upset any disruption to its LNG order flow should it occur. Because the oil and gas industry remains robust look for POWL stock to keep the momentum going.
Shutterstock (SSTK)
Online stock photography outlet Shutterstock (NASDAQ:SSTK) hasn’t had the same kind of year as either e.l.f. or Powell. It’s stock is down 38% in the past year. Yet the worst appears to be over as SSTK stock is up nearly 40% from the lows it hit.
Where the debut of ChatGPT unleashed a torrent of interest in how artificial intelligence (AI) could transform industries, it caused concern about how it would impact digital imagery. Shutterstock’s stock plunged as a result. But the stock photo shop decided if you can’t beat ’em, join ’em.
Shutterstock partnered with ChatGPT’s creator OpenAI to use its vast image library as a training ground for the AI outfit’s models. In return, it will be able to integrate Dall-E 3’s text-to-image capabilities into its platform tools. It also created subscription packages that allows users to turn stock photos into their own through the use of AI.
It’s going to be a long road to regain SSTK stock’s previous highs but Shutterstock now trades at significant discounts. Shares go for 12 times earnings estimates and a fraction of Wall Street’s expectations for earnings growth. With the stock also valued at just 14x the free cash flow it produces Shutterstock is cheap and on a path to recovery.
On the date of publication, Rich Duprey did not hold (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.