The S&P 500 is coming off its best weekly performance since June thanks to a late week rip-your-face-off rally that was triggered by a better-than-expected October Consumer Price Index (CPI) reading that came out before the bell on Thursday. However, I continue remain cautious on the overall markets as we head into the final six weeks of trading here in 2022.
While I do believe the Fed will pivot at some point in the first half of 2023, that move is unlikely to occur until monetary tightening has done substantial damage to the economy. Rising interest rates already have shellacked the housing sector, and as I noted in my column last Friday the pace of layoffs at well-known companies such as Meta Platforms (META) is picking up. I took some profits late last week to add to the cash allocation in my portfolio.
That said, after what has been mostly a dismal year for investors, there are some bargains in the market that I have started to nibble around. Today I will profile a couple small-cap names that merit consideration and that I have started to accumulate slowly.
Let's start with Unifi Inc. (UFI) , which is a manufacturer of synthetic and recycled polyester and nylon performance fibers that are found in apparel, footwear, home goods, furnishings and other consumer products. Apparel and footwear account for about 70% of Unifi's output.
Unifi has lost about 65% of its value over the past year even after a big rally last Friday. Despite the poor performance of the stock, Unifi has managed to increase sales at better than a 20% pace here in 2022. The problem has been that margins have suffered in its Americas and Brazil segments as supply chain challenges, rising input costs and a tight labor pool (predominantly in the U.S.) have acted as drags. In the past, Unifi has been able to protect margins by passing along higher input outlays to customers, but with significant increases in all aspects of those costs, price increases could not keep pace in those two geographic areas.
Unifi is likely to continue to face headwinds and lose money in the first half of 2023, but inventory levels at retailers, inflation and supply chain challenges should start to improve in the second half of 2023. Therefore, I think this is name you can accumulate very slowly over time and the equity starting to see some insider purchases.
Then there is Payoneer Global (PAYO) , which operates a payment and commerce-enabling platform that facilitates marketplaces, platforms and online merchants. Payoneer's main customers are small business owners worldwide. While the company is currently at breakeven levels, Payoneer is seeing 30% revenue growth.
Payoneer has a rock-solid balance sheet with about $500 million of net cash and marketable securities on it. Gross margins are improving on increasing revenues. Payoneer is also a beneficiary of higher interest rates. Payoneer had $15 million in interest income on the customer funds its holds on its platform in the third quarter, which was up from just $1 million in the third quarter of 2021 and company leadership projects interest income of $20 million in the fourth quarter. All in all, Payoneer is another small-cap name that seems worthy of slowly building a position in, even in this uncertain market.
(Please note that due to factors including low market capitalization and/or insufficient public float, we consider UFI to be a micro-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.)
