Two Intriguing Small-Cap Stocks
Anthony is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Finding small-cap stocks that have strong earnings and strong growth over the past few years can provide insight into potential long-term winners. Two stocks highlighted here have some exciting attributes that will be discussed to potentially uncover some great value for shareholders.
I used a stock screen that focused on small-cap companies. It also looked for companies with high profit margins and ones that have experienced significant EPS growth over the last five years.
The following is a one-year price chart for these companies so that we can compare their performance against that of the S&P 500 for the same time period.
Upon looking at the chart, it is apparent that these stocks collectively have underperformed the S&P 500 over the past year by a wide margin. Past results are not necessarily indicative of future returns, however.
IRSA Investments: A deeper look
IRSA Investments and Representations currently has a whopping dividend yield of 8.5%. Analysts expect that the company will earn $1.09 per share this year and $1.27 per share next year. This strong annual growth over the past five years slowed down a bit this year. In its most recent earnings release, the company earned 66 cents per share for the quarter ending in December of 2012, besting the analyst estimate of 40 cents per share.
IRSA Investments operates in the real estate development industry and is a leading real estate company in Argentina. It competes against larger real estate development companies in South America such as DLF Limited. Managing shopping centers and office buildings is its primary business.
For the nine months ending in March 2013, IRSA reported strong results. Net income increased 94% in this time period compared to the same period a year ago.
Shareholders' equity also increased by about 6%. Revenue from its shopping center segment grew by 22% in this time period. This impressive growth, if it can be continued, is a segment that can become a superstar for the company.
Tenant sales grew by an even stronger 24%, with portfolio occupancy currently standing at 98.7%. Continuing growth in tenant sales and is another strong potential catalyst for further share price increases.
The benefit that this company has is that it focuses on the real estate market in Argentina, which is more focused than, say, South America in general. This, however, can be a hindrance if real estate prices there were to fall significantly. As long as the real estate market is in good shape, this focus on its market should be facilitated by strong industry contacts and knowledge acquired over the years. This should provide a significant barrier to entry for any other company to compete in this market. Making sure key employees sign non-compete agreements is definitely something that should be considered.
Silvercorp Metals vs. Silver Wheaton
Silvercorp Metals is currently trading near its 52-week low of $2.52 per share. It has a current dividend yield of 3.9%. The company has grown its earnings by 26.52% per year over the past five years. Analysts have recently lowered their estimates for next year's earnings as that has now gone to $0.29 per share from $0.54 just 90 days ago. This is a large factor as to why the share price is currently testing its 52-week low.
Silvercorp Metals operates in the gold and silver mining industry and has mines in Canada and China. Its key competitor is Silver Wheaton (NYSE: SLW) and that company has a much larger market capitalization of over $8 billion.
Silvercorp is sensitive to the demand for precious metals and also to the price of commodities. Falling commodity prices and/or a drop in production are key risk factors that could hinder the company's ability to remain competitive.
Upon analyzing Silvercorp Metals' results for its fiscal third quarter released in February, several things become apparent. Adjusted earnings per share for this quarter came in at 9 cents per share. Unadjusted earnings per share were 3 cents, compared with 12 cents per share in the same period a year ago. There was a large decrease in sales compared to the year ago period, and this was attributed to a lower base production of metals.
On a positive note, in the mine in China, the Ying Mining District, the company mined a record amount of ore. Some 237,000 tons of ore was mined here, besting the previous record of 206,000 in the previous quarter. Silver sales from this mine were at their highest level since the third quarter of a year ago.
The company had significantly higher production costs for silver and gold this year than it did last year. The decrease in sales for the first nine months of this fiscal year to $148 million from $193 million in the year ago period will need to be improved in order for the company to continue to grow earnings.
Silver Wheaton reported decent results for its first quarter of 2013 ending in March of 2013. It increased its silver production by 13% and net revenues rose by 3%. Earnings per share fell year over year though, as lower commodity prices lead to lower realized prices for sold inventory. The company also now pays a 2% dividend yield which has been targeted to be 20% of operating cash flow going forward.
Silver Wheaton maintains a competitive advantage over Silvercorp by being a larger company with more resources. This, however, does provide for higher fixed costs and if flexibility is needed to adapt to changing industry conditions, Silvercorp may be able to adjust to this better. A prolonged downturn in metal prices could cause companies in this industry to have to adjust their focus.
To sum it all up
In conclusion, both IRSA and Silvercorp look to be stocks that can do much better this year than they did last year. For Silvercorp Metals, increasing commodity prices and higher demand for its production are keys to its success. For IRSA, high occupancy rates and success in navigating the real estate market in Argentina are key.
Silvercorp Metals is producing more ore, and if it can manage its production costs better, I see a much better year ahead for it. I would consider jumping in to own it now as it is near a 52-week low if I liked the stock to begin with. If the company can increase its sales back to 2011 levels, it should easily bounce strongly off of its 52-week low. It is clear that for both Silvercorp Metals and Silver Wheaton, a rise in the metal price will be necessary to maximize potential long-term price increases. I believe that the smaller company of Silvercorp Metals presents more room for upside if that occurs.
IRSA Investments is firing on all cylinders right now with tenant sales and its shopping center segment. You cannot ask for much more growth in those than we see right now. With a growing middle class in Argentina, this stock is definitely worth a look.
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Anthony Parsons has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!