With the stock market’s unprecedented rally over the past year, many large- and mid-cap growth stocks have become highly overvalued by traditional measures. Hence, there are rising fears among investors of a potential market bubble, and experts believe that these large- and mid-cap growth stocks will soon experience significant price corrections. So, given the market’s status, investing in small-cap stocks that have solid growth 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 generally compensated for by the potential ility of such stocks to deliver significantly higher returns.
Despite witnessing a stellar run over the past year, we think small-cap names Himax Technologies, Inc. (HIMX) and Vista Outdoor Inc. (VSTO) are still well positioned to generate attractive returns on the back of their solid fundamentals and compelling growth attributes.
Himax Technologies, Inc. (HIMX)
HIMX is a fabless semiconductor company that provides display imaging processing technologies in Taiwan, the United States and internationally. The company offers display driver integrated circuits (ICs) and timing controllers that are used in consumer electronic devices, including televisions, laptops, mobile phones, car navigation, virtual reality devices. It operates primarily in two segments – driver IC and non-driver products.
In December 2020, HIMX collaborated with Edge Impulse, a next generation intelligent device solutions developer with embedded machine learning (ML) models. The companies teamed up to launch the first ultralow power artificial intelligence (AI) vision and sensor fusion solution, which is ideal for predictive maintenance, condition monitoring, asset tracking, and occupancy detection applications.
Over the past three years, HIMX’s revenue and EPS have grown at CAGRs of 3.6% and 16.4%, respectively. In the fourth quarter, ended December 31, the company reported record revenues of $275.77 million, increasing 57.6% year-over-year. Small- and medium-sized driver ICs contributed 64.5% to its top-line because remote working resulted in strong growth in display drivers and HIMX hit peak quarterly shipment. Its EPS came in at $3.15, nearly double its year-ago value of $1.58.
The semiconductor industry is facing supply constraints amid strong demand for tablet and automotive displays. In fact, in the fourth quarter tablet TDDI marked its third consecutive strong quarterly increase. Consequently, the stock has gained 219.4% over the past year. As management shifts its focus to optimizing capacity allocation to increase the company’s assembly and testing capacity, Wall Street analysts expect HIMX’s current year revenue and EPS to rise 35.2% and 290%, respectively.
HIMX’s POWR Ratings reflect this promising outlook. HIMX 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 also has an A grade for Growth and Value, and B for Sentiment. It is ranked #10 of 99 stocks in the B-rated Semiconductor & Wireless Chip industry.
In total, we rate HIMX on eight different levels. Click here to check additional POWR Ratings for HIMX ( Momentum, Stability and Quality).
Vista Outdoor Inc. (VSTO)
VSTO designs, manufactures, and markets various consumer products in the outdoor sports and recreation markets in the United States and internationally. It has a portfolio of brands that provides consumers with a range of products for individual outdoor recreational pursuits. The company operates through two segments – Shooting Sports and Outdoor Products.
VSTO recently issued $500 million of senior notes in a private offering. It will use the proceeds to boost its liquidity. This final placement represented a $150 million increase over a previously announced amount. In October, VSTO acquired certain assets related to Remington Outdoor Company’s ammunition and accessories businesses and related intellectual property for $81.4 million. The company plans to leverage its scale, manufacturing infrastructure, and distribution channels of businesses to reach more consumers.
In its fiscal third quarter that ended December 27, VSTO generated $575 million in revenues, increasing 35% year-over-year, on the back of continued strength in outdoor recreation markets and robust demand for VSTO’s broad product portfolio. Shooting sports sales were up 41%,while outdoor products sales improved 24%, year-over-year. Its adjusted EPS came in at $1.03, rising 390% versus the year-ago value of $0.21.
The stock has surged nearly 334% over the past year. The social unrest stemming from social justice dissatisfaction in the U.S. resulted in a significant surge in gun sales last year. The recent integration of the Remington brand and the successful tuck-in acquisition of Hevi-Shot Ammunition should bode well for VSTO because the surge in consumer demand for ammo is likely to continue this year.
Furthermore, the strong outdoor activity trend that began in the second half of last year should grow this year as the mass coronavirus vaccination drive picks up. Analysts thus expect VSTO’s current year revenue and EPS to rise 22.5% and 1,254.2%, respectively.
VSTO’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which equates to Buy in our proprietary rating system. VSTO has an A grade for Growth and B for Momentum. Of the 33 stocks in the A-rated Athletics & Recreation Industry, it is ranked #5.
Beyond what I stated above, we have also given VSTO grades for Value, Stability, Sentiment and Quality. Get all VSTO’s ratings here.
The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.
Want More Great Investing Ideas?
HIMX shares were trading at $13.02 per share on Wednesday afternoon, down $0.68 (-4.96%). Year-to-date, HIMX has gained 76.18%, versus a 2.71% 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
|Ticker||POWR Rating||Industry Rank||Rank in Industry|
|HIMX||Get Rating||Get Rating||Get Rating|
|VSTO||Get Rating||Get Rating||Get Rating|