Even though the S&P SmallCap 600 Index has advanced 16% this year and 101% over the past 12 months, small company stocks have room to run — so long as today’s profit estimates are in the ballpark, explains Rich Moroney, editor of Upside.
To gauge upside potential, we calculated target prices for S&P 600 stocks that measure where a stock would trade if its price/earnings ratio reverted to a historical norm.
Specifically, we computed six implied prices using three-, five-, and 10-year norms for trailing P/E, multiplying those ratios by consensus estimates for current-year and next-year earnings.
Based on five-year norms for trailing P/E and projected current-year earnings, the average target price is 10% above the current price. The implied gain jumps to 20% using estimated profits for 2022.
On average, S&P 600 stocks are expected to grow per-share earnings 14% in 2021 and 18% next year. Notably, the stock below rank among the cheapest one-third of U.S.-traded stocks based on Quadrix® Value scores.
M/I Homes (MHO) trades at only seven times trailing earnings, versus a median of 12 for homebuilders in the S&P 1500 Index. If the P/E reverts to the five-year norm, its share price would climb roughly 34% based on estimated current-year earnings and 45% on projected 2022 profits.
A Value score of 96 ranks well above the average of 76 for peers in the S&P 1500. Robust demand, spurred partly by low mortgage rates, is boosting M/I’s home deliveries, which jumped 17% to 2,242 units in the December quarter. Last year, the company delivered 7,709 homes, up 22%.
Prices are surging for raw materials, but M/I has raised prices to pass along higher costs and boost profit margins. In the December quarter, gross profit margin hit 23.0%, up from 19.2% a year earlier. The stock is a Best Buy.
Up 25% so far in 2021, Patrick Industries (PATK) still looks reasonably valued considering its growth trajectory. The average of our six implied returns suggests 17% upside, which seems reasonable. The Value score is 81, up from 74 at the start of the year.
Patrick manufactures and distributes building products primarily to makers of recreational vehicles (RVs) and housing. For 2021, Wall Street projects per-share earnings of $6.24, up 44%. The consensus was $5.61 three months ago. Key growth drivers include robust demand for RVs and boats, marketshare gains, and contributions from acquisitions.
Last month, Patrick acquired a distributor of marine and powersports hardware for an undisclosed amount. The deal adds roughly $20 million in annual sales and is expected to immediately boost per-share earnings. Patrick completed six deals in 2020. The stock is a Best Buy.
A leading maker of off-road vehicles, boats, and motorcycles, Polaris (PII) is bullish on its growth prospects, reflecting robust demand, low dealer inventories, improved profit margins, and product launches. Founded in 1954, the company’s popular and growing brands include Indian, RZR, Bennington, and Slingshot.
Last year, Polaris shipped some 400,000 units to more than 120 countries. About 82% of revenue comes from the U.S. Polaris shares look attractively valued from most angles. With a Value score of 76, the stock trades at 18 times trailing earnings and 15 times estimated current-year earnings.
Based on historical P/E ratios, Polaris has at least 5% upside and an average implied gain of 24%. Analyst estimates for 2021 are trending higher but look modest, with the consensus calling for earnings per share to climb 13% on revenue growth of 15%. Polaris is rated Buy.
