Why I've Added These 2 Small-Cap Names to My Portfolio

First, a shout out to Doug Kass, who did a wonderful job on Tuesday putting up several charts showing how dismal market breadth has become on his Daily Diary. 

I mean, we are talking 1974 (the collapse of the "Nifty Fifty") and 2020 (the internet bust) types of metrics from a historical perspective. Not that this complacent market cares much for history or any of the myriad worries investors should have at the moment. After a brief blip up, the S&P VIX Index (VIX) once again sank back down to the 12 level on Tuesday.

However, we are going to try to be somewhat optimistic today as I have found a couple of new small-cap names that appear to sport reasonable valuations, which is a rare find in this market. I am starting to accumulate a position in both stocks this week.

Let’s start with Atlas Energy Solutions Inc. AESI. The company is now the largest producer of 100 mesh and 40/70 mesh sand that is employed as a proppant during the oil and natural gas well completion process in North America, after onboarding former competitor Hi-Crush in March 2024.

Atlas Energy Solutions now operates five proppant production facilities for its reserves within the Permian Basin, one of the most important and fastest-growing production areas in the country. The company also operates eight other mines and a logistics business as well. The company uses water from its aquifers near its core assets and electric dredges to produce its proppant. Management believes this process will cut production costs per ton by some 75% over traditional methods, which is important in a commodity-based business. The stock is down just over 20% from recent highs, largely as a result of reduced rig count in the Permian.

Even with the purchase of Hi-Crush, the company’s balance sheet is in good shape with a leverage ratio a bit under one. The company is seeing a huge revenue surge due to the integration of Hi-Crush, but revenues are projected to rise 25% in FY2025 as well. Commodity stocks deserve to trade at a discount, but at just over five times FY2025E EPS with a just over 4% dividend yield, AESI seems beyond cheap.

I also just took a small starter position in Mid Penn Bancorp, Inc. MPB, a small, Pennsylvania-based bank holding company that has been around since just after the Civil War. The bank is trading at a decent clip under book value and at just over eight times forward earnings. The shares also yield 3.6% and several insiders have made small purchases of the equity throughout 2024.

The bank’s loan book seems solid looking at its non-performing loans, delinquency rate and credit loss provisions. Deposits are growing slightly. In addition, the bank should get a nice little boost when the yield curve stops being inverted at some point.

And those are two fairly obscure small-cap names that appear to offer solid value in an overbought market.

At the time of publication, Jensen was long WFB and AESI.