It's the Great Paradox of the American economy. Despite investor fears, extreme market volatility and dire predictions of a prolonged slump in stocks, the U.S. consumer remains in a buying mood and is crowding back into the housing market.
This contradiction was underscored on Tuesday, when two new reports pointed to a strengthening housing sector and rising consumer confidence. The best way to play this accelerating trend in 2016 is through under-the-radar small-cap stocks. Below, we pinpoint three of the best.
Home prices in the U.S. rose at a faster pace in November, fueled by robust hiring growth and still-low mortgage rates. The Standard & Poor's/Case-Shiller 20-city home price index rose 5.8% from a year ago, following a 5.5% pace in October. At the same time, the Conference Board reported that consumer confidence rose in January compared to December.
Buoyed by rising employment and low gasoline prices, consumers are shrugging off overseas concerns and a roller coaster stock market. This dynamic should continue well into 2016, as oil prices stay low and the housing market continues to enjoy relatively low interest rates and a shortage of houses.
Now, you could play this trend by investing in the big name, large-cap housing sector stocks, but the problem is that the rest of the investment herd has already come to this obvious conclusion. The good news about housing is priced into the stocks of home improvement giants Home Depot and Lowe's Companies, or toolmaker Stanley Black & Decker. Great stocks, to be sure, but they've become pricey and their potential gains in 2016 are limited by their size.
The smart move now is to find strong small-cap stocks that most people haven't heard about that are undervalued, show a history of earnings growth, dominate their respective niches, and have plenty of room for future growth.
We've done the homework for you. Here are three such stocks that are poised to reap strong double-digit gains over the next year.
With a market cap of $716.18 million, Summit Materials produces and sells heavy construction materials, such as crushed stone, sand and gravel, cement and asphalt paving mixes, and limestone. It also provides construction services.
In the third quarter of 2015, the company reported that revenue increased 22.4% year-over-year to $426.3 million, missing analysts' revenue estimates of $444.73 million. But earnings came in at $27.4 million, or 72 cents in earnings-per-share (EPS), beating analysts' estimates of 69 cents in EPS.
With the stock now trading at about $14.40, the median analysts' consensus is calling for a one-year price target of $26.60, for a whopping gain of 84.7%. And yet the stock's trailing 12-month (TTM) price-to-sales (P/S) ratio is only 0.52, compared to the industry's average P/S of 0.94.
With a market cap of $649.35 million, U.S. Concrete sells ready-mixed concrete, aggregates, and concrete-related products and services for the construction industry.
U.S. Concrete reported that third-quarter revenue increased 49.4% year-over-year to $295.1 million, compared to $197.6 million in the prior-year quarter. Earnings came in at $31.2 million, or $1.97 in EPS, compared to $14.7 million, or $1.06 in EPS in the same year-ago quarter.
With the stock now trading at about $44, the median analysts' consensus is calling for a one-year price target of $69, for a gain of 55.7%. The stock's TTM P/S ratio is only 0.69.
With a market cap of $612.17 million, Quanex Building Products provides components for the window and door industry.
The company reported that third-quarter revenue increased 6% to $180 million. Earnings reached $9.6 million or 28 cents in EPS, compared to earnings of $8.7 million and EPS of 23 cents in the year-ago quarter. The stock's TTM P/S is only 0.91. With the stock now trading at about $18, the median analysts' consensus is calling for a one-year price target of $25, for a gain of 38.8%.
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John Persinos is editorial manager and investment analyst at Investing Daily. At the time of publication, the author held no positions in the stocks mentioned.