The Fed’s ongoing interest rate hikes to curb inflation are a cause of concern for investors as the economy faces the risk of a recession. In this scenario, buying and holding small-cap stocks with solid growth prospects, such as Masonite International Corporation (DOOR) and Arcos Dorados Holdings Inc. (ARCO), could be profitable.

Let’s discuss the reasons why small-cap stocks should be looked at for long-term investment.

Although consumer prices fell for the seventh straight month annually in January, the Personal Consumption Expenditure (PCE) increased 0.6% for the month and 4.7% year-over-year. The PCE data is crucial as the central bank tracks it closely to gauge inflation.

In addition, after the hotter-than-expected jobs report in January, the February jobs report will likely show that 200,000 jobs were created last month. The unemployment rate is expected to remain at 3.4%, indicating a tight jobs market.

In the semiannual Monetary Policy Report to Congress, it was stated, “The Federal Reserve is acutely aware that high inflation imposes significant hardship, especially on those least able to meet the higher costs of essentials. The committee is strongly committed to returning inflation to its 2 percent objective.”

This is likely to keep the stock market volatile in the upcoming months. During times of economic turbulence, companies with a smaller market capitalization may offer investors superior prospects for long-term growth compared to their larger peers.

Let’s analyze the fundamentals of the stocks to justify how investors could benefit from buying DOOR and ARCO in the long term.

Masonite International Corporation (DOOR)

DOOR, with a $2.03 billion market capitalization, designs, manufactures, markets, and distributes interior and exterior doors for the new construction and repair, renovation, and remodeling sectors of the residential and non-residential building construction markets worldwide. It offers molded panel, flush, stile and rail, steel, and fiberglass residential doors, as well as medium-density fiberboard (MDF) and architectural interior doors. 

In terms of forward non-GAAP P/E, DOOR’s 11.64x is 35.1% lower than the 17.92x industry average. Likewise, its 6.55x forward EV/EBITDA is 41.1% lower than the 11.13x industry average.

On January 3, 2023, the company announced its acquisition of Endura Products. DOOR’s president and CEO, Howard Heckes, said, “The combination of our two companies is a natural fit, and we are eager to leverage the combined organization to develop innovative new door solutions that accelerate our Doors That Do MoreTM strategy and maximize our growth potential.”

For the fiscal fourth quarter that ended January 1, 2023, DOOR’s net sales increased 6.3% year-over-year to $675.97 million. The company’s gross profit increased 6.1% from the prior-year quarter to $142.98 million. In addition, its adjusted EPS came in at $1.72.

Analysts expect DOOR’s EPS and revenue for the fiscal year 2024 to increase 17.3% and 4.7% year-over-year to $9.23 and $2.94 billion, respectively. It has a commendable earnings surprise history, surpassing the consensus EPS estimates in three of the trailing four quarters.

Over the past three months, the stock has gained 20.2% to close the last trading session at $91.66.

DOOR’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, equating to Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.

Within the Home Improvement & Goods industry, it is ranked #16 out of 56 stocks. The company has a B grade for Value and Momentum.

We have also given DOOR grades for Growth, Stability, Sentiment, and Quality. Get all DOOR ratings here. 

Arcos Dorados Holdings Inc. (ARCO)

Based in Montevideo, Uruguay, ARCO operates as a franchisee of McDonald’s restaurants. The company has the exclusive right to own, operate, and grant franchises of McDonald’s restaurants in 20 countries and territories in Latin America and the Caribbean. ARCO has a market capitalization of $1.75 billion.

In terms of forward non-GAAP P/E, ARCO’s 13.88x is 7.7% lower than the 15.03x industry average. Likewise, its 7.88x forward EV/EBITDA is 22% lower than the 10.10x industry average.

For the fiscal third quarter that ended September 30, 2022, ARCO’s total revenues increased 26.9% year-over-year to $921.70 million. Net income attributable to ARCO increased 89.7% year-over-year to $46.87 million.

Additionally, its adjusted EBITDA increased 14.9% from the prior-year quarter to $102.65 million, while its EPS came in at $0.22, representing an 83.3% increase from the year-ago period.

Analysts expect ARCO’s EPS and revenue for the quarter that ended December 31, 2022, to increase 10.4% and 25.4% year-over-year to $0.24 and $978.50 million. It has an impressive earnings surprise history, surpassing the consensus EPS estimates in three of the trailing four quarters.

Over the past six months, the stock has gained 13.4% to close the last trading session at $8.29. 

ARCO’s POWR Ratings reflect this positive outlook. The stock has an overall rating of A, which translates to a Strong Buy in our proprietary rating system. It is ranked #2 out of 45 stocks in the B-rated Restaurants industry. It has an A grade for Value and Sentiment. 

In total, we rate ARCO on eight different levels. Beyond what we stated above, we have also given ARCO grades for Growth, Momentum, Stability, and Quality. Get all ARCO ratings here. 

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DOOR shares were trading at $90.52 per share on Monday afternoon, down $1.14 (-1.24%). Year-to-date, DOOR has gained 12.29%, versus a 6.31% rise in the benchmark S&P 500 index during the same period.

About the Author: Malaika Alphonsus

Malaika's passion for writing and interest in financial markets led her to pursue a career in investment research. With a degree in Economics and Psychology, she intends to assist investors in making informed investment decisions. More...

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