If smaller-company stocks were a music mash-up, they’d be ‘smid caps’.
This collaborative asset class combines small-capitalization and mid-capitalization stocks. It is a broad collection of companies that span economic sectors. It encompasses market valuations above $300 million but less than $10 billion.
Lately, there have been more stocks falling into the smid cap category. This year’s bear market has devoured the share prices of many U.S. businesses, in turn bringing new members to the smid cap club. Some appear destined for micro-cap territory while others will recover.
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Among those that have the potential to bounce back are low-priced stocks that have been lowered by the tide but still have promising long-term catalysts. Over time, these three sub-$20 stocks should graduate to the large-cap big leagues.
When Will American Airlines Be Profitable?
After multiple appearances above $20, American Airlines Group Inc. (NASDAQ:AAL) is trading at around $13 per share. The airliner is likely to regain its previous high in part because light summer volume has coincided with the downturn, but more importantly because pent-up travel demand remains a potent force.
The former large-cap has lost altitude in the near term due to concerns about higher fuel and pilot salary expenses. This is of particular concern to American Airlines because it is operating with a heavy debt load compared to its four big peers.
But the company does have rising ticket prices in its favor. As travel restrictions continue to ease, leisure and business travelers alike are accepting higher fares, thereby helping to offset cost pressures. At last month’s annual shareholder meeting, management raised its second-quarter revenue growth outlook to 12% above pre-pandemic levels.
This showed that travel demand is trending in the right direction. As new pilots are trained and hired and jet fuel prices moderate, American’s bottom-line performance is expected to improve dramatically in 2023. Analysts are projecting EPS of roughly $2.00 next year which gives the stock a 7x forward P/E ratio. As cash flow improves and debt levels get reduced, American shareholders should be in for a smoother ride.
Lyft, Inc. (NASDAQ:LYFT) continues to slip to fresh all-time lows. Now trading around $12, the bottom has to be nearing for the ridesharing operator. First, last quarter’s swing in operating profitability showed that rider levels are trending higher. That was a major development that went ignored by the market and should ultimately prove that the Lyft business model works.
Similar to the airline industry, Lyft has had a tough time hiring drivers mostly because of surging gas prices. This is forcing the company to spend more on driver incentives and causing the market to punish the stock. The good news is that the issue is fixable and not permanent.
Eventually, there will be a tipping point where more drivers come on board, alleviating the supply side of the equation. The Biden administration’s suspension of the gasoline tax and a reprieve from sky-high prices at the pump would help in this regard. When this happens, Lyft will have improving demand on its side and a brighter financial outlook.
We’ll learn more when Lyft reports second-quarter results early next month. Management’s guidance for sequential Q2 revenue growth of 14% was conservative and could easily get beat. An aggressive push into the bike and scooter-sharing spaces could spur outperformance with warmer weather making these services more popular.
Will Abercrombie & Fitch Stock Recover?
Abercrombie & Fitch Co. (NYSE:ANF) stock has had its share of big downswings and the most recent drop from $48.97 to $16.59 is one of the worst. It is also one of the best opportunities to buy a resilient apparel operator whose brands remain as popular as they were a decade ago.
Lately, the trouble with Abercrombie & Fitch not surprisingly has to do with inflation. Higher freight and raw material costs are having a detrimental effect on the bottom line. Its most recent quarterly report showed a $0.27 loss per share that was well below Street expectations. Management’s lowered full-year sales growth and the operating margin didn’t help matters.
Over time, A&F should be able to work through these challenges and benefit from the popularity of its clothing. The Hollister brand, which has evolved into a bigger part of the business, appeals to a wide range of Generation Z customers. The emphasis of sub-brands Gilly Hicks and Social Tourist on gender and size inclusivity is striking a chord with younger shoppers.
The company’s shifting focus towards e-commerce also bodes well for improved financial performance. Digital sales account for almost half of overall sales and are soon expected to exceed brick-and-mortar sales. This comes with lower overhead and labor costs that should drive better profitability and stock performance in the quarters ahead.
Artcle by MarketBeat