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Stick to Our Small-Cap Strategy to Earn Optimal Returns in 2023

1/30/2023

Many small company stocks continue to be attractive for investors seeking total return.

More than a few companies followed in the SmallCap Informer continue to report quarterly results that mention both the impact of higher costs on their businesses and how they were able to adjust pricing in order to offset expenses. These companies then go on to report profits that are better than ever.

The experiences of these companies reflect the nuances of economic indicators released since the start of the year that show, at best, modest strength in the U.S. economy, and, at worst, minor downturns in some segments.

Perhaps most significantly, GDP rose 2.9% in the quarter, better than expected, and shutting down the storyline that the U.S. had entered a recession in 2022.

Core inflation rose in December at just 4.4%, the smallest annual increase since October 2021. Most tellingly, inflation pressures shifted from goods to services as the economy presses towards a state of equilibrium.

Personal income in the month modestly increased but consumer spending also dropped just as modestly, perhaps due to the cumulative effect of higher prices (and negative news reports).

The heated labor market cooled significantly as well, with new unemployment claims falling much more than expected. News of layoffs from high-profile global businesses may make for flashy headlines, but there is ample evidence that skilled tech workers will be able to quickly find new jobs in the vacancies that currently exist across many industries.

In the midst of the economic news maelstrom and the realignment of many mega-cap tech companies, it is more important to remember that a bottom-up investing style does not depend on monetary forecasts or broad predictions about future conditions for business. Individual companies react differently in different economic environments, giving individual investors the opportunity to uncover value when the rest of the market is panicking.

So it is with the two companies we cover in detail in this issue of the SmallCap Informer. Our first pick is new to coverage. Once again, we look to the underpinnings of the American economy for “companies behind the companies”—little-known names that provide materials and services to more consumer-facing businesses. Our selection has a long track record, solid financials, and a positive outlook, together creating a good formulation for investing success.

Our second recommendation is a past SCI pick has delivered fundamental success since we began covering it, but its share price remains stubbornly depressed. If fundamentals turn out as expected, the upside will be considerable.

As always, stay the course!

  • DOUG GERLACH

Read Doug's complete commentary and profiles of two recommended small company stocks in the February 2023 issue of the SmallCap Informer stock newsletter.

Not a subscriber? Subscribe to the SmallCap Informer and get monthly small company stock recommendations and updated buy/sell prices for each of the 48 high-quality small company stocks currently covered in the newsletter.