Should You Follow Stanley Druckenmiller's Interest in Small Cap Stocks?

This ETF has only performed 6.9% in the past 12 months, while the S&P 500 reached new all-time highs with its 24.2% run in the same time span.

Because small-cap stocks tend to historically outperform the rest of the market during low interest rate periods, Druckenmiller may be looking to call the coming cycle as accurately as possible.

However, not every small-cap stock is made equal; smaller investors should focus on healthy cash-flowing businesses that are trading at deep enough discounts for them to consider in their wealth-compounding campaigns, and these three fit the description.

Dine Brands: Delivering Cash Flow in All the Ways That Matter to Investors

This company’s financials show a free cash flow (operating cash flow minus capital expenditures) of $121.1 million in the past 12 months. This is good enough to boost the stock’s attractive 5.5% annual dividend yield today.

But more than that, here’s how the company’s history could set it up to beat the rest of the market when and if rate cuts come. Over the past five years, this free cash flow metric has grown at a compounded average growth rate (CAGR) of 7.2%, making today’s valuation as attractive as it’s been.

Denny's ROIC Turns Cash Flow Golden In Current Valuations

Showcasing a gross margin of nearly 40% in its financials, Denny’s management can deploy more capital in ways that bring shareholders another reason to stick to this stock as a potential value play for the small-cap return sponsored by eventual rate cuts.

The company’s return on invested capital (ROIC) rate stands above 10%, which would make young Warren Buffett jump on one leg after realizing how cheap this profit stream is selling for today.

Free cash flow at Denny’s has not grown by much in the past five years. Still, it has remained steady between $40 million and $70 million, indicating predictability and stability. Considering the company’s $339 million market capitalization, it trades at 8.9x its five-year average free cash flow, another cheap stock to add to this small-cap list.

Piper Sandler analysts used these metrics to justify Denny's stock's current $12 a-share price target. This ceiling is 84.6% above today's stock price, a mere 47.2% of its 52-week high.

B&G Stock: A Prime Example of Buffett's Cigar Butt Investment Strategy

This company is now giving investors potentially the best deal in this list, befit of Buffett’s ‘cigar butt’ strategy, which involves buying a company that is not necessarily that awesome but is cheap enough to give its investors one last push.

Looking at its financials, B&G stock is now trading at only 4.8x free cash flow while still pumping a gross margin rate of 22.4%, which is still up to the industry standard.

On a price-to-book (P/B) basis, B&G stock trades at a discount to its book with a multiple of 0.8x. Compared to the rest of the food industry, which trades at a P/B of 3.9x, investors now face a discount of 79.5% to peers in the space.

Knowing that the historical record is now against them, short sellers started to bail on the stock recently, as B&G stock’s short interest has declined by 5.6% in the past month.

The article "3 Small Cap Restaurant Stocks to Watch When Rates are Cut" first appeared on MarketBeat.