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Where can investors find ‘value’ stocks?

From hospitality to furniture to sports and recreation, many small-caps — although more volatile than their bigger counterparts — could be an undervalued buying opportunity.

While volatile market conditions in recent weeks have helped stocks to look more attractive, many share prices are still trading above their fair value. Earnings season could see companies issue warnings about their outlooks amid the impact the war in Ukraine is having on revenue and profit.

One report from Barron’s argues that if investors are looking for a bargain before earnings are released, they’d be better off picking small-caps. “[They] have more attractive valuations than their bigger brethren, and have a better chance of rising if they beat earnings expectations,” noted markets reporter Jacob Sonenshine.

Here are some sectors that can provide opportunities for value investing, and some small-cap stocks that might be worth sticking on your watchlist.

“[Small-cap stocks] have more attractive valuations than their bigger brethren, and have a better chance of rising if they beat earnings expectations” - Barron's Jacob Sonenshine

Bloomin’ Brands stocks could be undervalued

Rising inflation could impact bookings and sales at hotels and restaurants. In February, Bloomin’ Brands [BLMN] announced a 5% increase in prices to offset growing labour costs and inflationary pressures.

The company’s revenue growth has been slowing in the past couple of quarters and is expected to have declined again in the first quarter of 2022. Bloomin’ Brands issued guidance of $1.10–1.135bn, which would be an 13% increase on the $987.5m reported in Q1 2021. Despite this, the profit margin is looking healthy and is currently higher than it was pre-pandemic. Even if the company were to miss its guidance, the stock can be considered undervalued.

As of 21 April, the Bloomin’ Brands share price was trading at a trailing 12-month (TTM) price to earnings (P/E) ratio of 11.16 — lower than the restaurant industry average of 16.35. Q1 2022 earnings are due to be reported on 29 April.

The outdoor recreation market continues to grow

Many people emerged from lockdown intent on staying active and healthy, a trend that shows no sign of waning. Companies that supply sportswear equipment and focus on recreational activities, such as Camping World [CMW], Johnson Outdoors [JOUT] and Vista Outdoor [VSTO] remain extremely undervalued.

After a period of stagnating growth prior to the start of the pandemic, sales growth at Vista Outdoor has been positive in the quarters since. Revenue climbed 38% in the three months to the end of December, its sixth consecutive quarter of record-breaking financial results.

The company has been improving its free cashflow and margins, and believes that its sporting products segment “can continue to operate at high EBITDA margins” thanks to “the lean cost continue” and “opportunities to drive continued growth and operating efficiencies”.

38%

Jump in Vista Outdoor's revenues in the December quarter

As of 21 April, Vista Outdoor’s TTM P/E ratio was 5.17. The company is due to report Q4 2022 earnings on 5 May.

Smaller wellness stocks remain resilient

While the supply chain issues have squeezed big names and household brands in the health and wellness sector, there are some smaller players that seem to have remained largely unaffected. These include UK retail group Supreme [SUP.L].

The specialist in sports nutrition sells vitamins as well as vaping products. The business performed strongly in the first half of fiscal 2022. Revenue was up just slightly year-over-year by 9%, but gross profit climbed 27%, while there was a 25% rise in pre-tax profit.

The company provided a trading update earlier in April that indicated that commodity price inflation in relation to whey powder could affect near-term profitability. Despite this, the stock can be considered ‘undervalued’.

It had a TTM P/E ratio of 17.18 as of 21 April and a market cap of £188.4m. Full-year earnings should be reported in early June.

Home furniture demand is still healthy

Demand for furniture rocketed during the pandemic as more people were confined to their homes. Although confidence among US homebuilders fell to a seven-month low in April due to rising mortgage and supply chain kinks, demand for home furnishing should remain strong.

This should be good news for Bassett Furniture Industries [BSET], which earns its revenue through a mix of retail and online sales, wholesaling and logistics. After reporting a net loss in 2019 and 2020, it returned to profitability in 2021.

For the three months to the end of January, the company said it made progress “reducing the enormous [stock] backlog that has ballooned during the 18 months of the pandemic that preceded the start of our fiscal year”.

The stock had a TTM P/E ratio of 9.46 as of 21 April and a market cap of $167.2m. Q2 2022 earnings should be reported at the end of June.

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