We Fools love the fact that most small-cap stocks do not get a lot of attention from the media. Not only does that keep them off of Wall Street's radar, but it affords us the opportunity to buy them before the big money managers can swoop in.
With that in mind, we asked a team of Fools to highlight a small-cap stock that they think is a great buy right now. Read on to see why they chose Douglas Dynamics (NYSE:PLOW), Denbury Resources (NYSE:DNR), and STAG Industrial (NYSE:STAG).
Warm up your portfolio with this stock
Dan Caplinger (Douglas Dynamics): There's nothing like a winter-oriented stock to look at during the winter months, and Douglas Dynamics fits the bill well. The company's key products include snow-moving heavy equipment, as well as ice-fighting chemicals and road salt, and when winter weather strikes, the municipal and state governments that make up a significant portion of Douglas Dynamics' customer base predictably seek the things they need in order to keep their infrastructure running smoothly.
Yet recently, Douglas Dynamics realized that having a completely seasonal business can be problematic when it comes to consistent profitability. Accordingly, the company decided to acquire Dejana Truck and Utility Equipment last summer, spending more than $200 million to add the unit to the Douglas line. Dejana concentrates on up-fitting medium-duty Class 4-6 commercial work trucks, and it has strong relationships with truck manufacturers. Dejana's business also includes storage solutions and cable-pulling equipment, adding a whole new element to Douglas Dynamics' business that has no connection to winter whatsoever.
Douglas Dynamics has said that even with the Dejana acquisition, its primary focus will be on the snow and ice products that make up its core business. That makes February a good time to look closely at the stock and to watch how its diversified exposure could make it a year-round winner.
Not your typical small-cap exploration and production company
Tyler Crowe (Denbury Resources): Investing in exploration and production companies can be really challenging. Since their prospects are wholly tied to commodity prices, they are extremely cyclical by nature. At the same time, shale drilling in the U.S. poses a unique challenge. The high decline rate of a shale well means that these companies need to have pretty large capital-spending rates just to maintain existing production. If they drastically cut back on spending, large production declines could follow in a matter of months.
This is what sets Denbury Resources apart as an exploration and production investment. Denbury specializes in a different production type: CO2-enhanced oil recovery. This involves injecting CO2 into mature reservoirs to extract more oil in place. Based on current recovery rates from this process, there is a potential to extract an additional 33 billion to 83 billion barrels from existing reservoirs, and Denbury currently has land rights on as much as 16 billion barrels that can be extracted with CO2.
Another factor that makes this particular type of production unique is that it has incredibly low decline rates and doesn't require nearly as much capital spending to maintain production. That's how the company has been able to reduce its capital spending from $1.08 billion in 2014 to $200 million in 2016, while overall production has declined only 12.4% over the same time frame. This ability to slow investments without production levels falling off a cliff is part of the reason why the company has been able for the most part to keep its capital spending within its cash flow throughout this downturn without having to take on additional debt to meet its funding needs.
On top of that, Denbury has become much better at controlling costs. So much so that today the company's total cash cost is $33.33 per barrel. If oil prices remain close to $55 per barrel as they have, then Denbury could be a small-cap exploration and production company worth putting on your radar.
A hidden way to play e-commerce
Brian Feroldi (STAG Industrial): You've likely noticed that more and more companies are talking about e-commerce as a way to drive growth. That's a trend that is likely to continue indefinitely as more consumers move their purchasing habits online.
One backdoor way to profit from this trend is with STAG Industrial. STAG is a real estate investment trust, or REIT, that specializes in owning boring but highly profitable real estate assets such as distribution centers, manufacturing facilities, and warehouses. Companies of all shapes and sizes are investing in these real estate assets in order to service internet sales.
What makes STAG unique is that it seeks out buildings that house a single occupant. Most investors don't want to touch these assets since they can be quite risky to own at the individual property level. However, STAG's portfolio is so big that the company can spread out this risk nicely, which makes its financial statements quite predictable.
STAG has historically financed its growth by issuing stock to buy buildings. However, the company's stock nose-dived last year, which made issuing equity far too expensive. In turn, management temporarily financed its growth through debt and by selling off assets with poorer performance. Thankfully, STAG's stock has since recovered from its lows, which has allowed management to once again use equity to raise capital. I applaud this move as it shows that management is only interested in growth if it creates value for shareholders.
With a long-term trend at its back and a smart management team in place, I think that STAG is poised for years of growth ahead. Throw in a dividend yield of 5.8%, and I think this is a stock that should appeal to nearly any small-cap investor.