We recently published a list of 7 Best Nano Cap Stocks To Invest In. In this article, we are going to take a look at where Seritage Growth Properties (NYSE:SRG) stands against other best nano cap stocks to invest in.
What Are the Small Cap Bulls Saying?
In one of our recent articles about 8 Most Undervalued Penny Stocks To Buy According To Analysts, we talked about how many analysts are expecting small caps to perform well in a slowing economy. Here’s an excerpt from the article:
“To talk about what the stock market looks like today and in the near future. Tom Lee, co-founder of Fundstrat Global Advisors joined CNBC in a recent interview. He has been one of the strong proponents and supporters of small-cap stocks. Lee says that we are in a volatile environment currently, due to a few reasons, one being the elections in less than 30 days, the second being the Middle Eastern crisis which is scaring investors, and lastly the port strike that has the potential to cripple the economy. However, he still expressed his optimism that the year-end has a lot of tailwinds and investors shouldn’t be afraid to buy the dip. Moreover, Lee also highlighted that these current events are all short-term headwinds in a buying cycle and are expected to die down quickly.
Lee thinks that bottoms are tough and processed, and small caps are in the process of what could be a multi-year bottom. Therefore the conviction is that some people might want to buy the big names on NASDAQ and the AI market, however, with small caps trading at lower multiples of P/E less than 10, the risk and reward lie in small caps. Lee further mentioned that interest rate cuts and better earnings growth make the path for small-cap growth more visible.”
A few weeks ago, Richard Bernstein, Richard Bernstein Advisors CEO, joined CNBC for an interview to discuss the future of small caps. He mentioned that the reason why he is bullish on mid-caps and small-caps is because he sees earnings growth to be within these segments of the market. The forecasts are showing that small caps are going to grow at a multiple similar to the Magnificent Seven.
Bernstein explained that this is not unusual. When profit cycles take a dip companies have greater sensitivity to upturn and profitability. He mentioned that what’s extraordinary is that the Fed is easing into this accelerating environment, whereas normally, they would be tightening the policy rate. As the profits are expected to go up, the economy is naturally expected to follow, thereby supporting small-cap stocks. On top of that, the interest rates easing adds more fuel for the markets to rally.
Bernstein acknowledged that many investment managers are betting high stakes on the mega-cap stocks. He mentioned that if you are a momentum investor it makes sense to put all your stakes in the Magnificent Seven because that’s where the momentum is currently. However, if you are a fundamental investor it might not make total sense to invest in mega-cap stocks as they are on a slower growth trajectory with expensive prices. Whereas other parts of the market are cheaper and faster growing. Bernstein mentioned, historically speaking, a combination of cheaper and faster-growing stocks, which is how fundamental investors think is a good combination and a viable investment strategy.
Lastly, Bernstein showed his concern regarding speculative behavior, particularly in cryptocurrencies, which may signal potential risks for the economy. Bernstein warned that excessive financial asset inflation can be as damaging as inflation in real assets, leading to misallocation of capital within the economy. For context, asset inflation is what analysts normally refer to as bull markets, meaning that if bull markets continue to persist for an excessive period they create a bubble which leads to speculation and misallocation of cash.
Our Methodology
To compile the list of the 7 best nano cap stocks to invest in, we used the Finviz stock screener. We define nano-cap stocks to be those with a market capitalization of $50 million to $250 million. Therefore, we used the screener to find stocks that fit our criteria and then arranged them by market capitalization. Lastly, we ranked these stocks as per the number of hedge fund holders in Q2 2024 according to Insider Monkey’s database. Please note that the market caps were recorded on October 15, 2024. The list is ranked in ascending order of the number of hedge fund holders.
Why do we care about what hedge funds do? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A sunrise over a skyline filled with mixed-use destinations.
Seritage Growth Properties (NYSE:SRG)
Market Cap: $248.71 Million
Number of Hedge Funds: 22
Seritage Growth Properties (NYSE:SRG) is a real estate investment trust (REIT) that specializes in owning, developing, and managing various types of properties, primarily retail and mixed-use spaces, across the United States. Its portfolio includes interests in over 32 properties with approximately 4.1 million square feet of space available for lease. This includes both wholly-owned properties and those held in partnership with other entities.
The company has been focused on its plan of sale, a strategic initiative aimed at optimizing the company’s asset portfolio and enhancing shareholder value. Under this plan, management aims to gradually sell non-core and underperforming assets to generate cash proceeds. As of the second quarter of 2024, the company had accepted offers totaling over $150 million in gross proceeds from various property sales.
Seritage Growth Properties (NYSE:SRG) generated a total of $40.4 million from gross sales proceeding, which included $28.0 million from Multi-Tenant Retail assets, $3.8 million from Non-Core assets, and $8.3 million from two vacant/non-income producing Non-Core assets.
As of August, the company had five assets under contract, expected to yield $138.6 million in gross proceeds. It ended the quarter with $100.5 million cash and paid $50 million in debt repayment bringing its balance to $280 million.
Management plans to continue marketing additional assets based on market conditions, with anticipated sales occurring in 2024 and beyond.
O’keefe Stevens Advisory made the following comment about Seritage Growth Properties (NYSE:SRG) in its Q3 2022 investor letter:
“Seritage Growth Properties (NYSE:SRG) – A good idea on paper, hard to execute in practice. When we made our initial purchase in 2018, we thought the idea of repurposing existing Sears and Kmart properties at below-market rents into modern spaces, enabling the company to charge multiples of the prior rent, made sense. Increasing rents from $5 to $20 PSF with a 10-11% ROI seemed like a nobrainer. The return profile made sense, and applying moderate leverage to stabilized properties improved end economics. Multiple changes at the management level and a $1.44B loan from Berkshire with a 7% interest rate and covenants (yes, those still exist) made this an impossible endeavor. We thought partnering with Eddie Lampert would align our interests and prove an intelligent decision, given the capital and brain power he has put into this situation.
On paper, selling non-core assets and using the proceeds to fund Capex plans and ongoing corporate expenses makes sense. The problem is the number of properties the company needed to sell for this business model to work. Every year that went by materially lowered the company’s value as the interest expense proved to be a heavy burden. The company essentially turned into a death spiral where they were merely selling properties to meet the interest expense and having little remaining for the core part of the business plan. Compiling all this with the lockdowns in 2020 and 2021 and the supply chain mess still being worked through has further delayed this turnaround.
Today the company is much smaller. Seritage once owned 253 properties totaling 39m SF compared to today, where they own161 properties and 19m SF. During this time, they only paid down $100m of the term loan. The turnaround has taken too long, and the company has put itself up for sale. Again, on paper, this seems like a good idea; however, going through a sale of this proportion will take a long time in a calm environment. The rise in interest rates, tight credit markets, and equity market volatility make this a monumental task. I suspect the number of buyers for these properties, which was once small to begin with, is down to a handful. A critical issue with the SRG portfolio is that the assets are spread out across the country. One player is not going to purchase all these assets. Real Estate Developers and owners tend to concentrate their efforts on a single region (excluding the global players such as Blackstone, Simon, and other private equity groups). Seritage may be able to sell some nearby properties as a package but would likely take a discount to FV, or it has to sell each property one by one…(Click here to read the full text)
Overall, SRG ranks 2nd on our list of best nano cap stocks to invest in. While we acknowledge the potential of SRG as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for a promising AI stock that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.