The novel coronavirus has triggered significant uncertainty in the global economy. In times like these, it makes sense to be positioned in low-beta stocks with shored-up balance sheets.
At the same time, a well-diversified portfolio can deliver returns that beat inflation or index returns. Without small-cap stocks, any portfolio will be incomplete.
Let’s discuss 3 small-cap stocks with the potential to deliver robust returns in the near- and long-term:
- Hecla Mining (NYSE:HL)
- Cleveland-Cliffs (NYSE:CLF)
- Teekay LNG Partners (NYSE:TGP)
The big names can deliver steady returns, but the biggest value creators are found among the small-cap stocks.
3 Small-Cap Stocks You Better Not Sleep On: Hecla Mining (HL)
Hecla Mining is a low-cost silver and gold producer. With expansionary monetary policies driving precious metal prices higher, it’s clear why Hecla Mining makes for an attractive small-cap stock. As gold and silver sustain at higher levels, the company’s EBITDA margin is likely to expand, with improvement in free cash flows (FCF) besides.
As of fiscal year 2019, Hecla Mining reported 212.2 million ounces of silver reserves and 2.7 million ounces of gold reserves. Critically, the company’s silver margins have been attractive.
For the fourth quarter of 2019, the company’s all in sustaining cost was $11.31 an ounce, with silver margins at $6.16 an ounce. While Hecla Mining reported negative FCF in the first half of 2019, FCF turned positive in the second half. For the current year, higher gold and silver prices imply that FCF will accelerate, which would take HL stock price higher.
With a total liquidity buffer of $226 million as of March 2020, I don’t see any financial concerns. Further, there are no near-term debt maturities and with a leverage of 2.6, the company is well positioned to navigate the current crisis period.
I am therefore bullish on HL stock. The stock already trades near 52-week highs, but there is more juice in the rally for the coming quarters.
As an iron and steel producer, CLF stock has been depressed amidst the coronavirus-driven economic crisis. However, CLF stock bottomed out in March 2020 and has been gradually trending higher over the past months. I believe that the positive momentum is likely to sustain as economies crawl back to normal activity.
One key factor in my picking Cleveland-Cliffs is the company’s December 2019 acquisition of AK Steel, as this acquisition will deliver significant value in the coming years. AK Steel is one of the few steel producers with the capability to produce carbon and stainless-steel grade metals, critical components for automotive light-weighting trends.
As growth resumes for light vehicle production in the United States, top-line and EBITDA growth will take CLF stock higher. EBITDA margin expansion will also be supported with the consolidated company becoming a vertically-integrated steel manufacturer.
On a pro-forma basis, Cleveland-Cliffs has reported free cash flow (FCF) for the last-twelve-months at $923 million. Therefore, as economic activity strengthens, the company has the potential to generate FCF in excess of $1 billion. This will help in de-leveraging and shareholder value creation.
Teekay LNG Partners (TGP)
Teekay LNG Partners is another interesting name among small-cap stocks. The first factor that makes TGP stock attractive is the company’s cash distribution of $1.00. This translates into a cash distribution yield of 8.96% considering the current unit price of $11.16.
Of course, cash distributions will only sustain if the company has a clear cash flow visibility. And from that perspective, the outlook is positive. Teekay LNG Partners reported fixed rate contract revenue backlog stood at approximately $9.3 billion as of Q1 2020. The weighted average term of the backlog is 10.5 years. Therefore, cash flow visibility is strong for the coming years.
From a balance sheet perspective, the company has already completed its multi-year expansion plan in FY2019. Therefore, capital expenditure is likely to be muted for the foreseeable future. This allows the partnership unit to smoothly pay cash distribution, as well as deleverage. And make no mistake, having the scope to deleverage does not imply that the balance sheet is stressed. The partnership unit reported debt-to-capitalization of just 49.4% as of FY2019.
Overall TGP stock is worth buying for income investors with a clear cash flow visibility. The partnership unit is likely to trend higher in the coming years, with growth in cash distribution besides. The LNG industry tailwinds will support the growth story.