Friday's market pullback not only saw the S&P 500 pull back 2.5%, but also sparked around 3% selloffs in both the Russell 2000 and Russell Microcap indices. But that still wasn't a big enough move to vastly expand the inventory of deep-value names in the small-cap pond that I fish in -- although two names look close to rating buys.
Now, I was curious as I ran some screens on Saturday to see whether the market's value-opportunity set had increased. But I should have known better -- a 3% pullback in small-caps is just a blip in the scheme of things.
Still, the opportunities might soon increase amid the growing market nervousness about what the Federal Reserve might be up to. After all, the small-cap value world is littered with little-known names that are typically the first ones to suffer from market pullbacks.
It's no surprise that when the market has a bad day (or several), these names can see mini-bear markets quickly form. That's because small-cap value stocks have lower volumes, less liquidity, smaller floats and questionable quality. While the punishment doesn't always fit the crime, there can be some interesting opportunities in the segment for investors with longer time horizons and very strong stomachs.
I don't know if we're on the cusp of leg-down in the markets or not, but I do know that the market has fooled us several times over the past few years, most recently after Britain's June 23 Brexit vote. That's why I long ago gave up trying to predict the market's direction.
Still, if we get some volatility, I'll be looking for opportunities to pick up some names that have been on my radar but that that I've yet to pull the trigger on. Let's check two of these out:
FreightCar America (RAIL)
FreightCar America has been on my radar for months, and the stock fell nearly 4% on Friday.
RAIL is a so-called "double-net" stock, meaning that it trades at between 1x and 2x net current asset value. The stock is down about 25% year to date, but has been hanging tough since announcing poor second-quarter results early last month.
FreightCar America currently trades at 1.2x net current asset value, but another 10% hit to its price would put the stock below NCAV. Nonetheless, RAIL currently yields 2.6% and ended its latest quarter with no debt and $78.5 million in cash (or $6.40 a share).
TravelCenters of America (TA)
TA currently trades near a 52-week low at less than $7. That's just 0.61x tangible book value per share.
The stock has been volatile over the past year after reportedly rejecting a $14-per-share buyout offer from Golden Gate Capital in late 2015. But TA is nonetheless rich, with more than $1 billion in property, plant and equipment on its books.
Although the company also has $339 million of long-term debt, TA ended its latest quarter with $133.8 million in cash, or $3.62 per share.
The Bottom Line
Now, neither TA nor RAIL are for the faint of heart.
But my overall advice for investors is to buckle up. Market nervousness could make this week verrrry interesting.
