Shift4 Payments is on RBC Capital Market’s Small Cap Growth Idea list.
Courtesy of Shift4
Some of the fastest-growing small-cap companies have seen their stocks get hammered lately as investors worry about changes in the Federal Reserve’s monetary policy. That’s an opportunity to buy them on the cheap, if recent history is any guide.
The
iShares Russell 2000 Growth Exchange-Traded Fund
(ticker: IWO), which tracks small-capitalization growth companies, has tanked 13% since Nov. 8, when it hit its highest level since mid-February. The decline in these stocks has partially been driven by the Federal Reserve’s plan to end its bond-buying program soon. Wiping out the Fed’s $80 billion in monthly long-dated bond purchases could pressure bond prices and lift their yields. That dents the valuations of companies expecting the bulk of their profits to come many years down the line.
Small-cap growth stocks are trading at much cheaper valuations. For instance, the iShares Russell 2000 Growth ETF’s aggregate price to forward earnings multiple of 43.3 times is significantly lower than its Nov. 8 level of 51.9 times, according to FactSet. The multiple is also back around levels seen just before the start of the pandemic, when bond yields were higher—suggesting these stocks may already be pricing in the potential for a rise in bond yields.
Cheap valuations, however, aren’t reflecting the potential earnings growth for many of these companies. The ETF’s average expected per-share earnings growth rate for the next two years is 45%. Strong earnings growth could propel these stocks higher in coming years, so investors might want to think about getting in while the price is right.
Here are three stocks that RBC Capital Markets highlights on its quarterly Small Cap Growth Idea list—its highest conviction ideas for growth companies with market caps below $5 billion. RBC rates all three stocks Outperform.
Shift4 Payments
(FOUR) is provider of secure payment processing solutions with a market cap of $4.6 billion. The stock is down about 20% since Nov. 8, and its multiple on the next 12 months’ expected earnings has fallen to 43 times from 55 times over that period.
The company, however, just turned profitable this year and RBC expects it to grow its per-share earnings by 6 times from this year to 2023. While sales grow, so will profit margins, as the company scales. The analysts rate the stock Outperform with a $110 price target, more than double its current price. “The company is tapped into the large and secularly growing payments market in the U.S.,” the analysts wrote.
Jamf Holding
(JAMF) is a $3.6 billion company that provides software to organizations to manage and protect their
Apple
(AAPL) products and systems. The stock is down 38% since Nov. 8, and its earnings multiple has fallen to 142 times from 164 times. The company’s EPS is expected to more than double by 2023 from this year. RBC analysts’s price target indicate gains of 83% for the stock. “Apple innovation has transformed the technology landscape,” RBC wrote. “Jamf is in a strong position to leverage the growing preference for Apple in the enterprise.”
Ping Identity Holding
(PING) is a $2 billion identity solutions provider. The stock is down 24% and its price to earnings ratio has declined to 69 times from 87 times. The company’s EPS is expected to almost double by 2023. The RBC analysts see 82% upside to the stock over the next 12 months.
Write to Jacob Sonenshine at jacob.sonenshine@barrons.com
