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Here we highlight 2 Zacks Outperform rated microcaps that have had nice runs. So, is there still gas in the tank for future outperformance?
Back in May of 2024 we launched coverage on Perma-Pipe International Holdings, Inc. (PPIH - Free Report) with an Outperform rating. We also highlighted the name in the article, “How to Invest in Microcaps with Lumpy Revenue,” noting how its business is very project-driven and prone to uneven revenue performance.
Image Source: Zacks Investment Research
At that time, we liked the valuation and the robust backlog. The stock has returned about 250% since.
Perma-Pipe International Holdings, Inc. (PPIH - Free Report) has always had strong relationships in the Middle East, especially the UAE, benefitting from energy and water infrastructure investment in the region which utilizes its specialty piping and leak detection systems.
But its exposure to the data center build-out, both in the US and Middle East, is not as well-known. In response to data center demand the company has opened a facility in Ohio which it expects to be operating at full capacity in early 2027.
The ramp up costs associated with the Ohio facility, as well as ramp costs related to an expansion in Qatar, have negatively impacted Gross Margin, contributing to a 400-bps contraction to 29% in the first half of the year. Commodity inflation and Middle East conflict supply chain issues also played a role.
We view the margin pressure as more short-term and have maintained the Outperform rating based on order flow and top-line potential.
The other microcap, Friedman Industries Inc. (FRD - Free Report) , also has had a nice run, about 120%, since we upgraded the stock to Outperform back in December.
Image Source: Zacks Investment Research
Over 90% of its business is the manufacturing and processing of flat-roll steel products.
In Q1, Friedman Industries Inc. (FRD - Free Report) grew volume 28% YOY to 206,000 tons, benefitting from organic growth of 33,000 tons as well as 12,000 tons of acquisitive growth from the Century Metals acquisition.
While steel industry cyclicality is always a risk, the company’s expansion of its Miami warehouse and expectation for similar volume growth in the next quarter suggests operational momentum should continue in the near-term.
Importantly, while revenue grew 78% YOY in the last quarter, the company is demonstrating operating leverage as EBITDA more than doubled from $8.2 m to $19.3 m.
The stock is currently trading at 6.4X trailing 12-month EV/EBITDA TTM, which compares to 7.9X for the Zacks sub-industry, 19.5X for the Zacks sector and 17.9X for the S&P 500 Index. Over the past five years, the stock has traded as high as 18.7X and as low as 1.1X, with a five-year median of 5.6X.
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Image: Bigstock
Revisiting 2 Outperform Microcaps
Key Takeaways
Here we highlight 2 Zacks Outperform rated microcaps that have had nice runs. So, is there still gas in the tank for future outperformance?
Back in May of 2024 we launched coverage on Perma-Pipe International Holdings, Inc. (PPIH - Free Report) with an Outperform rating. We also highlighted the name in the article, “How to Invest in Microcaps with Lumpy Revenue,” noting how its business is very project-driven and prone to uneven revenue performance.
Image Source: Zacks Investment Research
At that time, we liked the valuation and the robust backlog. The stock has returned about 250% since.
Perma-Pipe International Holdings, Inc. (PPIH - Free Report) has always had strong relationships in the Middle East, especially the UAE, benefitting from energy and water infrastructure investment in the region which utilizes its specialty piping and leak detection systems.
But its exposure to the data center build-out, both in the US and Middle East, is not as well-known. In response to data center demand the company has opened a facility in Ohio which it expects to be operating at full capacity in early 2027.
The ramp up costs associated with the Ohio facility, as well as ramp costs related to an expansion in Qatar, have negatively impacted Gross Margin, contributing to a 400-bps contraction to 29% in the first half of the year. Commodity inflation and Middle East conflict supply chain issues also played a role.
We view the margin pressure as more short-term and have maintained the Outperform rating based on order flow and top-line potential.
The other microcap, Friedman Industries Inc. (FRD - Free Report) , also has had a nice run, about 120%, since we upgraded the stock to Outperform back in December.
Image Source: Zacks Investment Research
Over 90% of its business is the manufacturing and processing of flat-roll steel products.
In Q1, Friedman Industries Inc. (FRD - Free Report) grew volume 28% YOY to 206,000 tons, benefitting from organic growth of 33,000 tons as well as 12,000 tons of acquisitive growth from the Century Metals acquisition.
While steel industry cyclicality is always a risk, the company’s expansion of its Miami warehouse and expectation for similar volume growth in the next quarter suggests operational momentum should continue in the near-term.
Importantly, while revenue grew 78% YOY in the last quarter, the company is demonstrating operating leverage as EBITDA more than doubled from $8.2 m to $19.3 m.
The stock is currently trading at 6.4X trailing 12-month EV/EBITDA TTM, which compares to 7.9X for the Zacks sub-industry, 19.5X for the Zacks sector and 17.9X for the S&P 500 Index.
Over the past five years, the stock has traded as high as 18.7X and as low as 1.1X, with a five-year median of 5.6X.