3 of the Best Smaller-Cap Stocks to Own
These stocks of smaller companies with wide economic moats are good long-term buys when you can get them on sale.
Susan Dziubinski: Hi, I’m Susan Dziubinski, co-host of The Morning Filter podcast. Each week on the podcast, Morningstar Chief US Market Strategist Dave Sekera shares a handful of stock picks. Dave’s stock picks are typically stocks that are trading below Morningstar’s fair value estimates.
But besides valuation, Dave’s stock picks tend to have a few other things in common. For starters, they’re frequently stocks of companies with wide economic moats. Morningstar thinks wide-moat companies can maintain their competitive advantages for two decades or more. Dave also prefers companies that generate reliable cash flows, and if they pay a dividend, even better.
In today’s bonus stock-pick segment, we’re focusing on three smaller-company stocks that have been picks of Dave’s in the past. We think these are some of the best small-cap stocks to own, but investors should only buy these names when they’re trading at discounts to Morningstar’s
3 of the Best Smaller-cap Stocks to Own
We think Clorox is one of the best small-cap stocks to own. This consumer company’s portfolio of brands includes plenty of familiar names beyond its namesake brand, such as Liquid-Plumr, Pine-Sol, Kingsford, and KC Masterpiece, among others. We assign Clorox a wide Economic Moat Rating based on the strength of its brands and entrenched position with the leading retailers. Clorox has faced many challenges over the past few years, but we appreciate the company’s commitment to making long-term investments to maintain its competitive edge, and we expect Clorox to maintain the mid-40s gross margin that has historically characterized the business.
Read Morningstar’s full report on Clorox.
Huntington Ingalls Industries is another small-cap stock we like for the long term. As the largest independent military shipbuilder in the US, Huntington maintains a wide economic moat with its difficult-to-replicate products with long production and upgrade cycles. In fact, because ships are the longest-cycle defense product, Huntington is less sensitive to changes in the defense budget than other defense contractors, making it a defensive play even among defense contractors. The company also routinely returns cash to shareholders via dividends and share repurchases.
Read Morningstar’s full report on Huntington Ingalls Industries.
Lastly, we think Zimmer Biomet is a great smaller-cap stock to own. The company is the market leader in large-joint reconstruction, and we expect that aging baby boomers and improving technology suitable for younger patients will fuel solid demand for hip and knee replacement moving forward. We think Zimmer has built a wide economic moat based on high switching costs for surgeons and intangible assets, including intellectual property that protects the company’s product portfolio. We’re forecasting annual top-line growth of 3% through 2030.
Read Morningstar’s full report on Zimmer Biomet.
For more stock ideas, be sure to tune in to The Morning Filter each week wherever you get your podcasts and visit Morningstar.com, too.
Morningstar director Erin Lash, senior analyst Debbie Wang, and analyst Nic Owens provided the research behind this segment.
Watch 3 of the Best Value Stocks to Own for more from Susan Dziubinski.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
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