3 Small Cap Stocks to Buy on Any Weakness Since early-March, the Russell 2000 is down 6%, while the S&P 500 is up 15%. This underperformance is creating an opportunity to pick up some quality...

Since early-March, the Russell 2000 is down 6%, while the S&P 500 is up 15%. This underperformance is creating an opportunity to pick up some quality small cap stocks for a year-end rally.

For much of the past few years, small caps have consistently underperformed large caps. From December 2018 to February 2020, the S&P 500 was up 45%, while the small cap-index the Russell 2000 was up 36%. Needless to say, this is unusual as historically, small caps outperform large caps during bull markets. Some potential factors for this change in behavior are interest rates trending lower, the dominance and growth of mega-cap tech stocks which have become a large portion of the S&P 500, and lackluster economic growth.

This trend continued in the initial months of the pandemic following the stock market bottom in March 2020 as money flowed into tech stocks whose revenues were accelerating and large-cap stocks which were able to take advantage of lower rates. Entering 2021, there was optimism about small caps outperforming large caps especially with rising interest rates and an acceleration in economic growth. From November 2020 to March 2021, the Russell 2000 was up 55%, while the S&P 500 was up 33%.

Since then, large caps have grabbed the baton once again with the S&P 500 up 15%, while the Russell 2000 is down 6%. Although small caps face some notable headwinds in the coming months, this weakness is creating an opportunity in a handful of stocks with improving fundamentals. Investors who are looking to increase exposure to this asset class should consider buying Build a Bear Workshop (BBW), Eurodry (EDRY), and Immersion (IMMR).

Immersion (IMMR)

IMMR is based in San Jose, California, and focuses on the creation, development, and licensing of haptic technologies that allow people to interact with digital devices through touch. Its technology is used in various industries including mobile communications, wearables, consumer electronics, console and PC gaming, automotive, and medical markets.

IMMR delivered stellar second-quarter earnings as it reported $11 million in revenue, a 93% increase from last year. Of this $11 million, royalty and licensing revenue accounted for $10.9 million. Operating expenses declined by 23% as well which is a positive sign for margins and future profitability. It also generated $0.17 per share in EPS which is substantially better than last year's loss of $0.03 per share. The company also has $107 million in cash which is quite impressive considering its total market cap is $212 million.

The company's haptics tech is used by major console manufacturers like Nintendo (NTDOY), Sony (SNE), and Microsoft (MSFT) which is one reason for its strong report. However, the stock price finished lower and is trading at a six-month low. However, this is setting up a fantastic entry point as shares are quite cheap with a forward P/E of 7.2.

It's no surprise that IMMR has an overall B rating, which equates to Buy in our POWR Ratings system. The POWR Ratings are calculated by evaluating 118 different factors, each with its own weight. In addition to this, it also calculates component scores for each stock to give additional insight. It's not surprising that IMMR has a value score of B given that it has about 50% of its market cap in cash and a single-digit forward P/E in addition to expanding margins. To see more of IMMR's POWR Ratings, click here.

Build a Bear Workshop (BBW)

Build-A-Bear Workshop is based in St. Louis and is a specialty retailer. The company sells stuffed animals and allows customers to create their own. It has 450 stores all over the world with a mix of company-owned and operators in addition to franchises internationally. It also has a budding e-commerce division and creates partnerships with media companies to increase brand awareness and distribution.

Like many retailers, BBW delivered strong earnings. It reported a surprise profit of $0.60 per share, beating expectations of a loss of $0.53 per share. In last year's same quarter, it reported a loss of $0.83 per share. The company reported revenues of $91.7 million which was significantly better than analysts' expectations.

Next quarter, analysts are looking for EPS of a loss of $0.19 per share and $39.7 million in revenues for the coming quarter, and $0.33 in earnings per share on $262.8 million in revenues for the current fiscal year. It will be interesting to see if these estimates are revised higher in light of these results.

The POWR Ratings are also bullish on BBW as it has a B rating which equates to a Buy. This isn't surprising considering that it has a forward P/E of 11 which is significantly cheaper than the S&P 500's forward P/E. The stock also has a B for Growth which is consistent with its nearly 100% revenue growth. To see more of BBW's POWR Ratings, click here.

Eurodry (EDRY)

EDRY is a dry bulk shipper headquartered in Maroussi, Greece. The company provides ocean-going transportation services worldwide, and it owns and operates dry bulk carriers that transport iron ore, coal, and grains; and minor bulks such as bauxite, phosphate, and fertilizers. Currently, the company operates a fleet of seven vessels which includes 4 Panamax dry bulk carriers, 1 Ultramax dry bulk carrier, and 2 Kamsarmax carriers.

EDRY has been an outperformer with a 359% YTD gain, and it's continued to outperform on nearly every timeframe. Even during the market's pullback this week which has been most heavily concentrated in China with the brunt of the damage borne by cyclical stocks, EDRY has outperformed as the stock has remained range-bound.

One factor may be the company's strong earnings performance and rock-bottom valuation. EDRY has topped earnings expectations for four straight quarters. In Q2, it reported EPS of $2.75 per share, significantly better than the market average of $1.36 per share. And a substantial improvement from last year's loss of $1.73 per share. Analysts estimate that the company will generate $12.35 in EPS over the next 12 months which equates to a forward P/E ratio of 2.

Like many Wall Street analysts, the POWR Ratings are also bullish on the stock as it's rated a B which translates to a Buy. B-rated stocks have posted an average annual performance of 19.1% which compares favorably to the S&P 500's annual performance of 7%.

Given its strong earnings performance and outlook, it's not surprising that it also has an A grade for Growth. Earnings growth will likely continue especially as China has instituted some shutdowns following a spike in coronavirus cases which will likely exacerbate already backed up ports and spike shipping rates. To see more of EDRY's POWR Ratings, click here.

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This article was written by Jaimini Desai, Chief Growth Strategist for StockNews.com. Jaimini has been dialed into the hottest trends in investing:

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IMMR shares were trading at $6.76 per share on Friday morning, up $0.04 (+0.60%). Year-to-date, IMMR has declined -40.12%, versus a 19.00% rise in the benchmark S&P 500 index during the same period.

About the Author: Jaimini Desai

Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of POWR Growth newsletter. Learn more about Jaimini's background, along with links to his most recent articles.

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