It’s been a solid year so far for the major market averages, with the market up 7% year-to-date, a solid rebound after what was a brutal year in 2022.
However, the small-cap universe hasn’t fared nearly as well, with the Russell 2000 Index (IWM) barely in positive territory.
I attribute some of this underperformance to the relatively high weighting of regional banks in the index, which were hit hard following fears of bank runs.
Fortunately, this underperformance has left some small-cap names trading at deep discounts to fair value, and one has been stuck in the mud despite the significant metals price increases in the precious metals sector.
In this update, we’ll look at two small-cap names becoming more reasonably valued, and where I see their ideal buy zones.
Buckle Inc. (BKE)
Buckle Inc. (BKE) is a $1.7 billion company in the Retail-Apparel industry group that was one of the market’s best performers last year as it raced towards its multi-year highs near $50.00 per share.
However, the stock has since pulled back over 30% from its highs, and found itself back near key support at the $30.00 level.
For those unfamiliar, Buckle has over 440 stores in the United States and specializes in jeans, other apparel, footwear, and accessories.
The company released its Q4 2022 results (three months ended January 28th) last month and reported net sales up 5.5% year-over-year to $401.8 million. Meanwhile, quarterly earnings per share were up 3% to $1.78, while full-year EPS came in at $5.13, down just 1% from the year-ago period.
Despite this performance being impressive given the sharp decline in earnings we saw from several other retail names, the focus appeared to be on the weaker than hoped February sales numbers, with Buckle reporting a 6.9% decline in comparable sales.
However, it’s important to note that the company was lapping near very tough comps with a 33% increase in the February 2022 period.
Plus, commentary on the Q4 Call was not bad as Buckle noted in its prepared remarks that it is managing inventory well, it continues to work on store remodels and technology upgrades, and it plans to open six new stores in FY2023, pushing its total closer to 450 stores.
Just as importantly, Buckle continues to benefit from full-priced selling with minimal promotional activity, a positive sign relative to some peers which have had to liquidate inventory to make up for misjudging consumer demand last year.
Unfortunately, annual EPS is forecasted to decline this year slightly after it nearly doubled from FY2020/FY2021 levels, with current FY2023 estimates sitting at $4.85, translating to a 6% decline year-over-year.
While this isn’t ideal, and it’s often best to stay away from stocks that have seen peak EPS and it’s now rolling over, Buckle is currently trading at just ~7.1x forward estimates and that’s not including ~$290 million in cash ($5.80) and over $340 million returned to shareholders last year.
So, with industry-leading shareholder returns (regular dividends and special dividends), a significant discount to its historical multiple (7.1x earnings vs. 11x earnings), and a strong balance sheet, I would view any pullbacks below $31.60 as buying opportunities. Even using a lower multiple of 9.0x earnings, I see a fair value for the stock of $43.65.
Gold Royalty Corporation (GROY)
The stock has since sunk over 70% from its highs above $6.60 per share, a decline that has shaved more than $400 million in market cap off the stock.
However, I see this decline and underperformance having more to do with the stock being overvalued post-IPO debut because of high interest in a new royalty/streaming company available to invest in, and less to do with its fundamentals.
In fact, royalty/streaming companies have never been more attractive from an investment standpoint for investors looking to increase their exposure to precious metals given that the inflationary environment has eroded the profits of many producers.
However, royalty/streaming companies like Gold Royalty Corporation have net profit interests [NPI] or net smelter returns [NSR] on several mine projections, insulating them from inflation on operating costs and capital expenditures.
Meanwhile, they are lower-risk given that they’re more diversified than operators, with Gold Royalty Corporation having over 200 royalty assets and five in production, with the latter figure likely to increase to closer to 15 by 2029.
To put this in comparison, even the larger gold producers typically have less than 8 gold mines and they have seen margin compression because of rising labor and consumable costs, meaning that royalty companies provide exposure to gold and silver without the risk of inflation.
In Gold Royalty’s case, the company has two cornerstone assets held by the #2 and #3 largest gold producers, with these assets being the Ren deposit and Odyssey Underground in Ontario and Quebec (Canada), respectively.
The royalty ground on each mine could ultimately have over 5.0 million ounces of gold combined attributable gold, translating to over $200 million in future revenue from these two assets alone. Hence, if this weakness persists, I would view GROY as a potential takeover target.
Based on ~166 million fully diluted shares and a share price of US$2.15, Gold Royalty Corporation has a market cap of US$357 million, which might make it look expensive at first glance given that it expects to generate just ~$6.0 in revenue this year, leaving it trading at nearly 60x sales.
However, FY2023 revenue doesn’t do the company justice, with it having multiple assets not yet in production that could become significant contributors post-2025. Meanwhile, revenue should increase materially in 2024, with commercial production at Cote in Ontario and Odyssey in Quebec.
Given the significant upside that isn’t reflected in the company’s current financial results (as it has development stage assets that should head into production by 2025), I believe the best way to value the company is on a P/NAV basis.
Using what I believe to be a fair multiple of 1.0x NAV and an estimated net asset value of $510 million, I see a fair value for the stock of $490 million; I see a fair value for the stock of US$3.05. This translates to over 40% upside from current levels, and investors also receive an attractive ~2.0% dividend yield. So, for investors looking for exposure to gold, I see GROY as a Buy if it drops below US$2.00.
Disclosure: I am long GROY
Disclaimer: This article is the opinion of the contributor themselves. Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information in this writing. Given the volatility in the precious metals sector, position sizing is critical, so when buying small-cap precious metals stocks, position sizes should be limited to 5% or less of one's portfolio.