2 Prudent Speculator Small-Mid Cap Bargains

Market history dating back to 1927, per data from Professors Eugene F. Fama and Kenneth R. French, shows that Small-Company stocks have enjoyed terrific long-term returns of 11.8% per annum. Even better, the Professors show that inexpensively priced stocks (i.e. Value) have enjoyed a 13.1% annualized return over the same time span. And, the numbers show that Dividend-Paying Stocks have outrun Non-Dividend Payers by 1.7% per year.

For managed account clients, I run a Small-Mid Dividend Value strategy utilizing the same philosophy of buying and patiently holding what I believe to be undervalued stocks for their long-term appreciation potential. Not surprisingly, given the downturn in the equity markets in 2022, I think it a fine time to consider stocks like the two battered names I feature this week.

LIGHTING THE WAY

Acuity BrandsAYI
(AYI) is a leading light manufacturer that designs, produces and distributes a full range of indoor and outdoor lighting and control systems for commercial, industrial, infrastructure and residential applications.

The firm’s backlog, particularly for operators of commercial, education and industrial facilities, has grown in recent quarters given supply-related challenges. Acuity has also embarked on what the company has deemed its “Product Vitality” program, which aims to add new products and improve existing ones through investments, while price increases over the past year amid fluid cost gyrations have protected gross margins.

Management has also been busy repurchasing shares over the past couple of years, so the dividend is very modest. The effort has reduced the share count by about 20% since May 2020, although this pace will likely take a back seat to business investment in the new fiscal year.

Acuity has generated double-digit returns on equity in every year since 2005 despite deploying very little debt. Shares trade for less than 13 times the $13.00 to $14.00 of per share earnings CFO Karen Holcom expects next year, even as higher inventory costs are expected weigh on margins in the first half of the year.

No More Toying Around

The past year has been a whirlwind for toy maker and entertainment concern HasbroHAS
(HAS). The death of former CEO Brian Goldner has brought pressure from activist investors to reshuffle the business, resulting in the retirement of two board members. Part of the activists’ agenda, management has recently considered the sale or restructuring of its entertainment business eOne, which it purchased right before the pandemic, The company has already sold eOne’s music business.

Such moves are in a different direction from Hasbro’s previous strategy of using an entertainment platform to promote its toy licenses but could potentially unlock shareholder value and offer a fresh start, allowing it to focus on its strengths in toy making and gaming.

Further, current CEO Christian Cocks laid out new priorities for the firm—leaning into its biggest gaming brands to generate additional revenue, investing to build out a brand insights platform for data-based decision-making and rejuvenating its direct-to-consumer and digital effort—to meet a list of financial objectives by 2027.

A cost saving’s program called Blueprint 2.0 has also been drawn up that incorporates newfound rigor in approving item development to weed out inefficient products that don’t meet a certain ROI hurdle. The plan targets mid-single-digit compounded annual revenue growth through 2027, operating profit growth of 50% over the next three years (with a 20% margin by 2027), and operating cash flow in excess of $1 billion annually, accelerating over the period.

As the saying goes, the proof will be in the pudding, but shares look cheap, having declined over a third this year, trading for less than 14 times NTM EPS estimates and sporting a robust dividend yield of 4.1%.