Fed Rate Rise Spawns New Opportunity in Small-Caps

Yesterday the Fed decided to boost interest rates by 25 basis points – raising the range of the federal funds rate to 0.75%-1.00%.

And stocks responded favorably – with the Dow increasing 108 points by the time the market closed.

Now, history shows that the rally might be short lived.

While it’s normal for stocks to steadily march higher during the first few days following a rate hike, the market tends to cool off by day seven.

Not to worry, though.

Even if the momentum slows, that doesn’t mean there’s not money to be made right now.

As senior analyst Jonathan Rodriguez pointed out last week, small caps — particularly value names — are among the best performing stocks when rates rise.

As you’ll recall, he noted that small caps — particularly value names — are among the best performing stocks when rates rise.

Today, he reveals one of the market’s most undervalued small-cap gems…

Ahead of the tape,

Louis Basenese
Investment Director, Wall Street Daily

Radio Might Be Down… But It’s Not Out

Terrestrial radio is one of the most powerful media platforms in the world.

Radio reaches 5 billion people worldwide — 70% of the population, according to the United Nations.

Here in the United States, 93% of Americans aged 12 or older listen to the radio at least once a week, according to Nielsen Audio. That’s better engagement than TV (85%) or smartphones (74%).

No doubt, the business of radio — driven mainly by advertising revenue — has declined as marketers shift resources to digital ad space.

But terrestrial radio is still an $18 billion industry, with many broadcasters now successfully making the move from AM/FM to internet radio — a lucrative, rapidly growing market.

And one such company is currently making waves…

A Shining Star of Value

Salem Media Group Inc. (SALM) is one of the nation’s most prominent Christian faith-based broadcasting companies.

Salem owns and operates 118 radio stations in 40 markets around the country.

It also delivers programming to more than 2,800 affiliate stations nationwide.

And despite the firm’s considerable reach in the radio industry, the company sports a market cap of just $193.7 million.

Over the last five years, Salem has driven earnings growth of 18.9% — more than two times the industry average. And the company projects a whopping 47% increase in annual earnings per share in fiscal 2018.

Revenue growth has lagged the industry a bit, but the company has expanded its digital media and publishing segments — which have helped make up for the slowdown in broadcasting sales.

In fact, the digital media division has grown by 68%, to $45 million, in the last five years. It now comprises 17% of total sales. And the publishing segment has nearly doubled sales in the last three years.

Since 2012, the company has also increased operating income by 36.1% through deep cost cuts in the face of revenue declines.

Better still, Salem carries just $274.8 million in debt — a third of the industry average.

Priced at a Steal… but Not for Long

We already know that Salem’s balance sheet looks great. But it gets better…

Its valuation metrics reveal that the stock is trading at a steep discount right now. Consider:

  • Price-Earnings: Salem trades at 17.4 times trailing earnings. That’s a discount of 62% to the industry average and a 66% discount to the Russell 2000 small-cap index
  • Price-to-Sales: Shares trade at 0.7 times trailing sales — a 75% discount to the industry and 84% below the Russell
  • Price-to-Book: The stock sports a price-to-book ratio of 0.9. That’s a 74% discount to the industry
  • Price-to-Cash Flow: Salem trades at 5.2 times cash flow — half the industry average and nearly three times less than the Russell
  • Enterprise Multiple: If you’re unfamiliar, this metric measures a company’s “takeover” value in the event of an acquisition. The lower the multiple, the better. And the company trades at an enterprise multiple of 9.2. That’s less than half the Russell.

Best of all, the company offers a dividend yield of 3.5% — more than double the yield of the Russell 2000 and the Russell 2000 Value stock index.

And dividends represent just 27% of free cash flow — meaning there’s little danger of a payment cut.

Driven by the company’s improving fundamentals, shares have gained 52% in the last year — outperforming the broader small-cap market by nearly double.

Add it all up and Salem could be the small-cap bargain of the year. And the company doubles as an attractive takeover target.

Bottom line: Rising interest rates will likely boost small-cap value stocks big-time. And Salem represents one of the market’s deepest value plays.

On the hunt,

Jonathan Rodriguez
Senior analyst, Wall Street Daily

Photo: Alex E. Proimos via photopin cc

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