800 Undervalued Small-Cap Stocks

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you'd like to add some undervalued small-cap stocks to your portfolio but don't have the time or expertise to hand-pick a few, the Vanguard Small Cap Value ETF  (NYSEMKT: VBR  ) could save you a lot of trouble. Instead of trying to figure out which undervalued small-cap stocks will perform best, you can use this ETF to invest in about 800 of them simultaneously.

The basics
ETFs often sport lower expense ratios than their mutual-fund cousins. This ETF, focused on undervalued small-cap stocks, sports a very low expense ratio -- an annual fee -- of 0.1%. It recently yielded about 1.9%, too.

This undervalued-small-cap-stocks ETF has outperformed the S&P 500 over the past five and 10 years. As with most investments, of course, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.

Why undervalued small-cap stocks?
It's smart to include smaller companies in your portfolio, as the best of them can grow rapidly and eventually become large caps. It's also smart to focus on undervalued stocks, as they offer margins of safety. Thus, undervalued small-cap stocks deserve strong consideration, whether you buy them in bulk via an ETF or whether you cherry-pick them. (Note that some of this ETF's components aren't that tiny.)

More than a handful of undervalued small-cap stocks had strong performances over the past year. The Goodyear Tire & Rubber Company (NASDAQ: GT  ) surged 69% and yields 0.8% via a newly reinstated dividend. It has faced some labor issues (including a brief hostage-taking last year) and recently resolved a long struggle with French labor unions. With a forward P/E ratio near 7, the stock seems a value. The company reports its fourth-quarter results on Feb. 13. Its third quarter was reasonably strong, thanks in part to a recovering industry. Its free cash flow has been in the red but is improving recently.

United Rentals  (NYSE: URI  ) popped 48% and recently reported a strong quarter, with revenue up 7% over year-ago levels and adjusted earnings surging 25%. It's three times bigger than its nearest competitor and is spending aggressively on stock buybacks, which can help keep its growing share count in check. By buying RSC Rentals, United Rentals has been able to add higher-margin clients to its business.

GameStop  (NYSE: GME  ) gained 31% and yields 3.1%. Some are bearish about it, seeing the growth of online gaming hurting a physical retailer like GameStop. (The new Apple TV, for example, will offer game-playing functionality.) Bulls, though, point to the new-console cycle, with new PlayStations and Xboxes ushering in a new wave of used games for the retailer to sell. They might concede that the long-term future is uncertain, but they like the company's near-term prospects.

Other undervalued small-cap stocks didn't do quite so well over the last year but could see their fortunes change in the coming years. AGL Resources  (NYSE: GAS  ) advanced just 16% and yields a solid 4.2% thanks to a recent dividend increase. It has been racking up contracts such as an additional one with United Parcel Service to supply liquefied natural gas to the delivery giant's fleet. Situated in some regulation-friendly areas, it has been boosting its natural-gas-transmissions business. In its fourth quarter, rising operating costs depressed earnings, however.

The big picture
If you're interested in adding some undervalued small-cap stocks to your portfolio, consider doing so via an ETF. A well-chosen ETF can grant you instant diversification across any industry or group of companies -- and make investing in and profiting from it that much easier.

The No. 1 Way to Lose Your Wealth Without Even Knowing It
You’ve fought hard to build wealth for you and your family. Yet one all-too-common pitfall could completely derail your dreams before you even know it. That's why a company The Economist hails as "an ethical oasis" has isolated five simple questions you must answer to ensure that your financial future is really secure.

Can you answer YES to all five of these eye-opening questions?
Click here to find out -- before it’s too late!

Read/Post Comments (2) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2825341, ~/Articles/ArticleHandler.aspx, 9/3/2015 3:03:00 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Selena Maranjian

Selena Maranjian has been writing for the Fool since 1996 and covers basic investing and personal finance topics. She also prepares the Fool's syndicated newspaper column and has written or co-written a number of Fool books. For more financial and non-financial fare (as well as silly things), follow her on Twitter...

Today's Market

updated 5 hours ago Sponsored by:
DOW 16,351.38 293.03 1.82%
S&P 500 1,948.86 35.01 1.83%
NASD 4,749.98 113.87 2.46%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/2/2015 3:59 PM
VBR $100.02 Up +1.23 +1.25%
Vanguard Small-Cap… CAPS Rating: ***
GAS $60.39 Up +0.13 +0.22%
AGL Resources, Inc… CAPS Rating: ****
GME $41.81 Up +0.63 +1.53%
GameStop CAPS Rating: *
GT $29.30 Up +0.63 +2.20%
The Goodyear Tire… CAPS Rating: ***
URI $67.36 Up +2.02 +3.09%
United Rentals, In… CAPS Rating: ***