Small Caps That Have Priced In A Hard Landing For Big Upside

Key Points

• The U.S. stock market is divided into two camps. On one side, a hard landing scenario drives prices down; on the other, a soft landing creates much hype.
• The names in this small group will represent companies that have potentially priced in the possibility of a hard landing, leaving nothing but an upside whether there is one or not. 
• Analysts love them, and the fundamentals are nothing but solid; the only problem you'll have is picking and choosing between them.

It should not be new information that, when the underlying business cycle turns for the better - or worse - certain groups of stocks tend to anticipate the turn and make their moves, large ones at that, before other pockets of the economy.

When it comes to the United States economy, certain places, such as real estate, have been hit with discounts ahead of a possible 'hard landing' due to aggressive FED hikes. Luckily for those perspicacious enough, another corner in the market offers an almost unfair advantage concerning the risk-to-reward scale.

Through some rigorous digging, a few worthy mentions have been uncovered for you: the central thesis? Significant upside at minimal downside is found exclusively within the following small capitalization stocks with the worst-case scenario priced into their valuations.

Standex International

The Vanguard Russell 2000 ETF NASDAQ: VTWO has underperformed the S&P 500 by as much as 11.5% year-to-date, sending an alarming sign implying that the broader market may be in for a slowdown. That is where Standex International NYSE: SXI comes in to save the day.

By underperforming the S&P 500, this stock falls into the category of small caps that may have priced in the possibility of recession while also vastly increasing the potential upside if the FED engineers a safe way out of one. 

This fact may be one of the pillars analysts used when coming up with their price target of $205 a share, boldly implying that the stock needs to rise by 43.4% from today's prices. 

Analyst outlooks may be riding on the back of Standex's latest financial momentum, as the company had a few positive trends to boast about in their latest quarterly results press release.

Starting with the lifeblood and social proof of the company's value thesis, Fast Growth (Standex's new flagship product program) revenues jumped by 40% over the year. Moreover, the company's operating margins grew by 1.4%, a huge achievement for a company this size.

Despite management providing a disappointing outlook for the rest of 2023, the stock is still only 14.8% from its all-time high prices, implying that the market is seeing little risk down the line for this name. It is wise to be agreeable with the market on this one.

SunPower

Now that oil prices have risen out of control, as much as 46% in the past quarter alone, consumers and investors may be looking for alternative energy providers to cushion these WTI swings. The chosen candidate is SunPower NASDAQ: SPWR, but wait until you read this.

Analysts are going all in on this one, as their consensus price target of $14.05 a share implies an almost too-good-to-be-true 112.2% upside. As rare as this one may be, it is, in fact, too good while still being true.

This stock is trading at prices not seen since the COVID-19 pandemic peak years, despite net revenues having grown by an astonishing 100%.

This is what is so good about these small companies, it becomes relatively easier to deliver explosive fundamental growth, while markets typically take longer to recognize such trends, giving everyday investors the advantage.

Net leases for solar panels grew by 108% over the year for SunPower, with over 39 thousand additional units currently outstanding in the backlog. Management rightfully boasts these key performance indicators (KPIs) within their quarterly presentation.

Taking a mix of this past outperformance, with the potential of future performance - boosted by oil prices - are more than enough trends to justify such optimism from analysts. Will you sit this one out or join analysts when they pop open the champagne?

Cars.com

Everyone is familiar with the craziness around the car market in the United States today, significantly after COVID-19 disrupted supply. Today's environment, filled with high borrowing costs for a new car and declining inventory value at your neighborhood dealership, has sent market preference toward a different business model.

Companies like Cars.com NYSE: CARS are not exposed to the impending swings in car values since they hold no physical inventory. Instead, they make their buck from connecting buyers and sellers. Despite a boom or continued bust in the vehicle market, Cars.com will be reasonably stable throughout.

The nature of this business and the ensuing stability in both possible economic scenarios may be the driving forces behind analysts placing a consensus 35.2% upside from today's prices in this stock.

According to the company's press release, covering the results for the past quarter, traffic (visits) to their website increased by 5%.

This single data point could be taken as an initial working point in proving the investment thesis correct: are consumers looking to Cars.com for answers not available at ordinary dealers?

A curated list of small companies, which are the heartbeat of American business cycles, is at your disposal to pick and choose which one suits the best potential upside in the coming quarter. Bottoms up!