EC 6 Small Caps To Fund Your Retirement

The words “small cap” and “retirement portfolio” aren’t often heard in the same sentence. Stocks with smaller market capitalizations can be fantastic long-term growth investments. After all, most mega-cap stocks started out as small-cap stocks.

Plus, small caps (along with value stocks) have been proven to outperform the market over time, according to Fama and French. So it makes all the sense in the world to keep small caps on your radar as an investor.

But small caps generally fail my basic tests of suitability for a retirement portfolio. As I wrote in my critique of Warren Buffett’s Berkshire Hathway (BRK-A), a stock to be held in a long-term retirement portfolio should have a highly predictable business model, should be “technology proof” and should pay steadily rising dividend. Most small-cap stocks will fail one — or often all — of these criteria.

But there are definitely some small-cap stocks out there that are completely appropriate for a retirement portfolio, and I’m going to offer up six of them today. With any luck, none of them will be small caps forever. Their steady growth will eventually land them in mid-cap or even large-cap territory.

StoneMor Partners (STON)

I’ll start with StoneMor Partners (STON). This is a stock that doesn’t make it onto too many investors’ radar screens. To start, it’s a publicly traded cemetery. That’s about the least sexy business you can run. Secondly, because it’s a small cap with a market cap of just $850 million, not too many analysts cover it. And compounding things further, it’s organized as an MLP, making it problematic to own in an IRA account.

But perhaps worst of all, cemeteries have ridiculously complex accounting and are required to defer recognition of a good chunk of their revenues until … well, until their customer dies and gets interred.

All of these factors contribute to make StoneMor something of an outcast. But I consider StoneMor a fantastic retirement stock. Its business is predictable. Until we discover the cure for old age, it’s definitely technology proof. And it happens to pay one of the highest yields currently available on the market, at 9.5%.

And the story actually gets better. Following the recent volatility in StoneMor’s stock price, company insiders have been aggressively buying the stock.