On Wednesday I wrote about the huge divergence between the negative headlines that dominate the news versus the robust economy and massive profit surge happening at the corporate level. We haven't seen this type of earnings gains since 2010 when the economy was recovering from the worst post-war recession on record.
Thanks to a strong economy and a 40% cut in the corporate tax rates, black ink is spilling everywhere. Corporate profits throughout the economy rose more than 16% year over year in the second quarter. Profit growth from the S&P 500 was even better, rising almost 25%, while small-cap concerns in the Russell 2000 are printing money with nearly a 35% earnings gain on average from the like period a year ago. Revenues also were up about 10% for both the S&P 500 and Russell 2000 companies.
These factors are why I believe we likely will get a year-end rally to close out 2018, especially if trade tensions ebb as new trade agreements are reached. Today I'll cover a few small-cap names that should benefit from this profit surge.
LGI Homes Inc. (LGIH) continues to be my favorite small home builder and is in a sector that has underperformed the market by a large margin all year. The company made just under $4.75 a share in earnings in fiscal 2017, should print right at $6.50 a share in profits this fiscal year and at $7.50 to $8.00 a share in fiscal 2019. Given that growth, the shares are too cheap in the high $50s.
Beazer Homes USA Inc. (BZH) is another small home builder that looks significantly undervalued at current trading levels.
Next up is Prestige Consumer Healthcare Inc. (PBH) , which sells household cleaning products and over-the-counter health care products that include Chloraseptic, Luden's cough drops and Compound W. A boring business, to be sure, but it is very stable. Earnings should continue to grow in the high single digits and the stock goes for 13x forward earnings.
Gulfport Energy Corp. (GPOR) seems to be a cheap oil and natural gas producer with assets in the Utica Shale region of eastern Ohio and south-central Oklahoma. These types of domestically focused companies are the primary beneficiaries of the corporate tax cut within last year's tax reform package. Gulfport continues to grow production at more than 25%, is lowering the leverage on its balance and should go free cash flow positive when it reports third-quarter results.
Cabot Oil & Gas Corp. (COG) is a similar producer that should see a surge in revenue and profits in fiscal 2019 and is more than reasonably valued. Both of these small-cap energy plays also have seen net insider buying so far in 2018.
(This commentary originally appeared on Real Money Pro on Aug. 31. Click here to learn about this dynamic market information service for active traders and to receive daily columns like this from Paul Price, Bret Jensen and others.)
