Growth stocks have outperformed value stocks by a wide margin over the past decade. And thanks to the COVID-19 pandemic, 2020 was  a superb year for growth stocks, while value stocks struggled to bounce back after a market correction last March. However, some analysts believe that a vaccine-driven economic recovery will cause a massive shift in investments from expensive growth stocks to quality turnaround candidates.

Mass coronavirus vaccinations and rising consumer spending should help some pandemic-hit companies return to operational health. However, there are rising fears among investors of a potential market bubble and some observers believe that  large- and mid-cap growth stocks will at some point witness a massive price correction. In fact, many growth stocks from the technology sector have already started selling-off.

So, given the market’s status, we think investing in undervalued small-cap stocks that have solid upside potential could be a wise decision.

It’s true that small-cap stocks typically carry higher risk profiles than their mid- or large-cap counterparts, but the higher risk is typically compensated for by the ability of many such stocks to deliver significantly higher returns. Moreover, given their relatively smaller size, these companies have more room for growth.

Group 1 Automotive, Inc. (GPI), Nu Skin Enterprises, Inc. (NUS) and Owens & Minor, Inc. (OMI) are currently trading at discounts to their peers and we think are well-positioned to deliver solid returns as the economy steadily recovers.

Group 1 Automotive, Inc. (GPI)

Texas-based GPI operates in the automotive retail industry. The company sells new and used cars, light trucks, and vehicle parts, as well as service insurance contracts. It  arranges related vehicle financing and offers automotive maintenance and repair services. GPI owns and operates 182 automotive dealerships, 236 franchises, and 49 collision centers in the United States, the United Kingdom and Brazil that offer 31 brands of automobiles.

In terms of forward p/e, GPI is currently trading at 8.85x, 53% below the industry average  18.83x. In terms of trailing-12-month p/s, the stock is currently trading at 0.26x, significantly lower than the industry average  1.38x.

GPI has travelled a bumpy road over the past year. The pandemic spelled a  complete halt in activities in  many sectors resulting in widespread unemployment and a slump in the demand for automobiles.  As a result, GPI  disposed of three franchises (Nissan,  Buick and GMC) during 2020. The sales  generated approximately $60 million in trailing-twelve-month revenues. GPI has disposed of two franchises (Cadillac and Mini) in Texas so far this year, which  generated approximately $40 million in trailing-twelve-month revenues.

However, it is also worth noting the continued growth in GPI’s digital retailing platform, AcceleRide. In the preceding quarter, the company integrated customer down payments into the platform, began the implementation of instant credit decision-making features, established an electronic payment feature utilizing Zelle to provide real time payment to customers selling their vehicles, and launched the AcceleRide app.

In the fourth quarter, ended December 31,GPI’s revenues decreased 3.9% year-over-year to $3 billion. Its new vehicle revenues declined 5.1% on an 11.5% decline l in unit sales. However, GPI sold 3,500 vehicles through its  AcceleRide platform, representing 65% year-over-year growth. Its total revenues generated from its U.S. operations were flat year-over-year at $2.4 billion, contributing nearly 81% to its  overall top-line. In fact, GPI realized a more than 25% improvement in its U.S.  productivity during the quarter. Its  adjusted EPS came in at $5.66, rising 88% from the year-ago value of $3.01.

GPI has gained 23.8% so far this year. Its  fourth quarter results highlighted a strong recovery in its U.S. operations, with revenues reaching the pre-pandemic levels. In addition to maintaining its cost discipline, the reengineering of its business processes throughout the past year culminated in massive productivity improvements in its  U.S. and U.K. businesses. Hence, Wall Street analysts expect GPI’s current quarter revenue and EPS to rise 2.6% and 169.9%, respectively.

GPI’s POWR Ratings reflect this promising outlook. GPI has an overall rating of B, which equates to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.

It has an A grade for both Value and Momentum. It is ranked #5 of 25 stocks in the B-rated Auto Dealers & Rentals industry.

In total, we rate GPI on eight different levels. Click here to check additional POWR Ratings for GPI (Growth, Stability, Sentiment and Quality).

Nu Skin Enterprises, Inc. (NUS)

NUS develops and distributes personal care and wellness products worldwide. The company provides skin care systems and focuses on  other innovative consumer products, product manufacturing and controlled environment agriculture technology. It sells its products under the Nu Skin, Pharmanex, and ageLOC brands, selling  its products directly and  through distributors and online websites.

NUS’s forward p/e ratio currently stands at 13.18, significantly lower than the industry average  21.20. In terms of trailing-12-month p/s ratio, the stock is currently trading at 1.06x, 29.9% lower than the industry average  1.5x.

In January, NUS acquired Ohio-based 3i Solutions, an innovative company that develops and manufactures ingredients for consumer markets through proprietary encapsulation technologies. The deal should  enable NUS to create new products and increase the performance of its formulations in beauty and wellness by leveraging 3i’s proprietary research and processes.

In the fourth quarter (ended December 31, 2020), NUS reported a revenue of $748.2 million, improving 28% year-over-year, driven by  customer growth of 34% versus  to the prior year. Its  recent introductions Boost Device and Nutricentials Bioadaptive skin care products helped generate 28% revenue and 29% sales leader growth during the quarter. In addition, the manufacturing segment continued to generate strong results, posting 42% revenue growth in the quarter. Its  EPS came in at $1.40, surging 94% versus  its  year-ago value.

NUS grew revenue in each of its reporting segments in the last reported quarter, with particular strength in the Western markets where its brand affiliates adopted social commerce to share its products. As a result, the stock has more than doubled over the past year. NUS expects a strong 2021 driven by its robust product pipeline and digital initiatives combined with steady growth in  customers and sales leaders. The company also  plans to expand its  customer reach through the introduction of new product innovations later this year. Analysts also expect NUS’ current year revenue and EPS to rise 8% and 8.8%, respectively.

The POWR Ratings are also high on NUS. It  has an Overall Rating of A, which translates to a Strong Buy. The stock also has an A grade  for both Value and Quality. In the B-rated Medical – Consumer Goods Industry, it is ranked #4 of 12 stocks.

Beyond what we stated above, we have also given NUS grades for Growth, Momentum, Stability and Sentiment. Get all NUS’s ratings here.

Owens & Minor, Inc. (OMI)

OMI is a leading healthcare logistics company that incorporates product manufacturing, distribution support and innovative technology services. The company is dedicated to connecting medical products to the point of care by providing vital supply-chain services to healthcare providers and manufacturers of healthcare products in the United States and internationally. It operates through two segments – Global Solutions and Global Products.

OMI’s forward p/e ratio currently stands at 9.86, which is significantly lower than the industry average  23.68. In terms of its trailing-12-month p/s, the stock is currently trading at 0.24x, 96.8% lower than the industry average 7.67x.

OMI has been playing a critical role since the onset of the COVID-19 pandemic last year. The company has reportedly delivered more than  12 million personal protective equipment (PPE) units to healthcare workers since January 2020. OMI has also partnered with several federal and state agencies to strengthen the nation’s response to the pandemic through investment in PPE manufacturing capacity, distribution of PPE to frontline healthcare workers, and working to replenish the strategic national stockpile.

OMI’s record earnings results for the fourth quarter (ended December 31, 2020) did not fail to impress the Street. OMI generated $2.36 billion in revenues, improving 8% year-over-year, driven by increased demand for PPE and  strong performance in its home healthcare business. Its Global Products segment revenue grew 58% year-over-year to $575 million. And its adjusted operating income more than doubled year-over-year due to productivity gains and  favorable product mix. Its adjusted EPS was  $1.14, surging 396% compared to its year-ago value of $0.23.

OMI has gained 23.7% year-to-date and could see further momentum because the company expects the demand for PPE kits to remain strong this year also.  OMI plans capitalize this on  its higher production capacity and greater manufacturing efficiencies. Its  management further anticipates a revival in several elective surgeries and greater demand for home healthcare products this year. Wall Street analysts also expect OMI’s current year revenue and EPS to grow 12.1% and 45.1%, respectively.

It is no surprise that OMI has an overall rating of B, which equates to Buy in our POWR Ratings system. OMI has an A grade for both Value and Growth. It is ranked #47 in the 181-stock Medical – Devices & Equipment industry.

Click here to see the additional POWR Ratings for OMI (Momentum, Stability, Sentiment, and Quality).

The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.

Want More Great Investing Ideas?

9 “MUST OWN” Growth Stocks for 2021

How to Ride the 2021 Stock Market Bubble

5 WINNING Stocks Chart Patterns

K.I.S.S. for the March Stock Market

GPI shares were trading at $161.59 per share on Tuesday afternoon, down $0.79 (-0.49%). Year-to-date, GPI has gained 23.47%, versus a 3.96% rise in the benchmark S&P 500 index during the same period.

About the Author: Sidharath Gupta

Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies. More...

More Resources for the Stocks in this Article