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3 Small-Cap Value Stocks to Power Your Portfolio

By Sean Williams - May 26, 2016 at 8:20AM

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With PEG ratios well below one, these small-cap value stocks could be screaming buys.

This has been a year for the ages. Despite being less than five full months into 2016, we've already witnessed gold's best quarter in 30 years, the worst start to a new year for the major indexes in history, and the most voracious rally in the S&P 500 to erase those early losses since 1933. This volatility is enough to drive any short-term investor to insanity, which is why I'm glad we're thinking about the long-term here at The Motley Fool.

One of the best ways to beat market volatility is to consider investing in value stocks, or companies that trade at low fundamental multiples, which can include price-to-book, price-to-earnings, price/earnings-to-growth (PEG), or any combination of similar metrics relative to the overall market. The investing assumption is that value stocks are less likely to have wild price swings lower since they're already perceived to be inexpensive, and thus could be great companies to buy to help hedge against the threat of a falling market.

Are small-cap value stocks your ticket to success?

The idea of investing in value stocks is certainly not a new strategy -- it's what Warren Buffett used to grow his wealth from $10,000 to nearly $70 billion in a six-decade span. But many investors often overlook a veritable treasure trove in the value stock arena when hunting for bargains: small caps.

Small-cap stocks, or companies with market valuations of less than $1 billion, are typically bypassed by skittish investors as there's the perception, especially among the media, that smaller companies inherently carry more risk. I'm here to tell you that this isn't always the case. Value stocks come in all shapes and sizes, and some could prove quite helpful in helping power your portfolio to new heights. Today, we'll briefly look at three.

Image source: Movado.

Movado Group

First, for you timepiece buffs out there, I'd suggest small-cap investors check out Movado Group (MOV 2.09%), especially after the company's valuation took a hit following its Q4 report in which it delivered a 22% decline in net income and tepid 2017 guidance.

The big allure of a company like Movado is that it offers brand-name luxury. Movado's brand is widely recognized throughout most of the world, and it sells at a price point that caters to a broad audience. Movado watches, which typically retail for between $400 and $2,000, also hit a niche price point where the middle-class can get a taste of the well-to-do lifestyle without breaking their bank account. There's also the simple fact that in spite of the rise of smartphones, total Swiss watch exports rose by more than 30% between 2010 and 2015 according to data from the Federation of the Swiss Watch Industry. In other words, consumers are still buying fine timepieces, even with smartphones.

Movado also offers something you won't see with the other two small-cap value stocks below: a dividend. On top of its board of directors authorizing a fresh $50 million share repurchase agreement, which replaces its now expired $100 million agreement under which 1.86 million shares were repurchased in fiscal 2016, Movado approved an 18% increase to its quarterly payout to $0.13 per share. This new payout works out to a healthy 2.2% yield .

Valued at just 11 times forward earnings and sporting a PEG of 0.84, Movado Group could be a company you'll want to dial into your portfolio.

Image source: Lionbridge Technologies.

Lionbridge Technologies

Next we have Lionbridge Technologies (NASDAQ: LIOX), a global provider of translation, marketing, and content management solutions -- as well as a holding in my personal portfolio.

What attracted me to Lionbridge was three things: niche product offerings, inorganic growth opportunities, and fast-growing cloud services.

There simply aren't many companies around the world that offer the array of content translation services that Lionbridge can bring to the table. From GeoFluent to Translation Workspace, Lionbridge offers services for enterprises and translation agencies that help them better reach customers in local or overseas markets. This niche focus on content translation services could make Lionbridge a potentially attractive asset for a larger technology company.

But I'm not counting on a buyout. Instead, I'm counting on Lionbridge Technologies to continue diversifying into non-technology industries and growing its product offerings through acquisitions. For instance, in January 2015, Lionbridge acquired CLS Communication for $77 million, boosting its presence in the life science, financials, and industrial sectors. It also purchased Geotext this past November for $11 million plus additional earn-out potential in order to get a foothold in legal translation services. This inorganic growth is quickly diversifying Lionbridge's revenue stream without putting the company deeply into debt.

Finally, you'll see most of Lionbridge Technologies' services showing up in the cloud. With Inc. forecasting that the translation service industry will be worth $39 billion by 2018, Lionbridge's focus on the fastest growing aspect of translation services, the cloud-based applications, should pay off.

Trading at six times forward earnings and a PEG well below one, Lionbridge looks mighty attractive.

Sucampo Pharmaceuticals

Lastly, value investors looking for a good deal in the small-cap arena would be wise to check out drug developer Sucampo Pharmaceuticals (NASDAQ: SCMP).

Most value investors would likely pass over Sucampo for two key reasons. First, it's in the biotech sector, which is often known for its volatility. Secondly, it's reliant on a single drug, Amitiza, a chronic constipation therapy, for the entirety of its revenue generation. Relying on a single drug can be risky, especially when considering that branded drugs only have a finite time period when they're protected.

Despite these "concerns", there's a lot for value investors to like with Sucampo. Recently, it acquired a bigger piece of the Amitiza revenue pie -- Amitiza is licensed to Takeda Pharmaceuticals -- when it acquired Japan's R-Tech Ueno for about $275 million. Doing so should allow Sucampo to quickly grow its revenue this year, which is good news since it's been working hard to keep its costs under control. The result should be a rapid improvement in adjusted EPS for 2016 and beyond.

Sucampo is also hoping that it'll be able to expand Amitiza to pediatric patients. Two ongoing studies into patients ranging from ages 6 to 17, and from 6 months to 6 years old, are ongoing. While an approval wouldn't net Sucampo nearly the patient pool that it currently has with adult patients, it would undoubtedly mean a bump higher in the company's top- and bottom-line.

Trading at just nine times forward earnings and a PEG of 0.82, Sucampo could be worth digging into.

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