Q4 Stock Predictions: 3 Small-Cap Stocks Set to Soar

Stocks to buy

Mega-cap tech titans have been reaping economic rewards of 2023 while leaving most of the rest of the market behind. While a few growth firms see their shares continue to rally, several companies are struggling to tread water as the economy weakens amid inflation and rising interest rates.

However, for those ready to take the plunge, an opportunity is being created for small-cap stocks. These three small-cap stocks to buy have gotten crushed in 2023. Yet with shares down much more than the fundamentals would explain, these three are set for rapid recoveries once the tide turns.

Black Hills (BKH)

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Black Hills (NYSE:BKH) is a utility company that provides both natural gas and electric services throughout the Great Plains and Rocky Mountains. It serves about 1.1 million gas customers and delivers electricity to another 220,000 customers.

BKH stock has gotten rocked. Shares are down 20% over the past quarter and more than 30% year to date (YTD). This represents a rare and outsized move in a sector as stable as utilities.

However, investors have gotten scared about the utility space. Soaring interest rates have made dividend-paying blue chips, such as utilities, less attractive compared to fixed income. Meanwhile, utilities generally carry lots of debt on their balance sheets to finance their costly power investments. As rates rise, interest expenses will increase on that debt.

Therefore, the bear case against BKH stock makes sense. It makes sense that the shares have sunk. However, things have gotten way out of hand. Black Hills is one of America’s relatively few “Dividend Kings”. Those are the companies that have raised their dividends for at least 50 years in a row. BKH stock’s unmatched stability and income track record are now at a massive discount with shares yielding 4.9%.

Sensient Technologies (SXT)

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Sensient Technologies (NYSE:SXT) is a materials company focused on making specialty chemicals and product additives.

Its bread and butter is the production of colors, flavorings, and fragrances. These are the subtle additives that go into packaged foods, beverages, cosmetics and more to get their color, taste, smell, and feel just right. Sensient’s products tend to represent a low cost as a portion of a products’ total retail price, and are invaluable in maintaining a brand’s quality and appearance. That is precisely the key to providing significant customer loyalty and recurring revenues.

Despite the positives, Sensient shares have gotten pounded this year amid the sell-off in all things related to the packaged foods industry. In fact, SXT stock is now down from a peak of $100 in 2022 to just $57 now. However, Sensient’s basic ingredients aren’t going anywhere. And with the sharp decline, the stock is down to 17 times earnings while offering a nearly 3% dividend yield.

Hingham Institution for Savings (HIFS)

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Hingham Institution for Savings (NASDAQ:HIFS) is one of America’s most successful small banks. HIFS stock has risen more than 3,000% since the family that runs the bank took over in the early 1990s.

Hingham has built its business on two principles – unmatched cost controls and exceptionally conservative investing. The bank rarely suffers losses from lending, as evidenced by its loan losses holding at one-tenth of the industry average. Many years it writes no bad loans at all. With the economy seemingly heading toward a recession, Hingham’s rock-solid lending practices will reassert themselves as a standout feature.

Thanks to soaring interest rates, HIFS stock has been plunging over the past year. Hingham traditionally positions its balance sheet for lower interest rates and is currently seeing its profitability contract sharply. But the bank’s asset quality remains impeccable, and management is making the most of the current situation.

Meanwhile, due to the current sell-off, shares are down to 10 times trailing earnings and selling at a discount to book value for the first time in years. And with short interest above 10% of the float, HIFS stock is set to skyrocket once interest rates start to decline again.

On the date of publication, Ian Bezek held a long position in BKH and HIFS stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.

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