According to the “January effect,” small-cap stocks outperform large-cap stocks in the first month of the calendar year.

But over the last several years, the January effect has changed dramatically.

Investors knowing that the effect is coming often bid up small-cap stocks in November and December.

Because of that change, the reliability of the January effect as a predictive tool for investors has diminished.

Then came the correction of 2018.

The selling in the last quarter of last year set the stage for a more pure January effect than we have seen in years.

From October to the lows in the market, the Russell 2000 index of small-cap companies dropped by a whopping 24%.

Large-cap stocks, by comparison, only fell by 17%.

Heading into 2019, it was easy to bet on small-cap stocks.

Sure enough, the Russell 2000 gained almost 10% in January compared to a gain of only 6% for the Dow Jones Industrial Average.

That outperformance is significant, but so far it’s only slightly retraced the losses from Q4 2018.

Looking forward, investors can expect more recovery and outperformance compared to large-cap stocks.

The economy is not even close to receding.

The U.S. Federal Reserve is taking the foot off the tightening pedal.

Most importantly for certain small-cap stocks, valuations are compelling.

And our Money Morning Stock VQScore™ system has a number of small-cap candidates to buy in February for the remainder of 2019.

One industry in particular stood out to me as an opportunity.

Netflix is changing media for better or worse. Companies in the media space have been seriously disrupted. That disruption impacts valuations and creates opportunity.

Here are three of my favorite small-cap media companies to buy for February 2019…

Best Small-Cap Stocks to Buy for February 2019, No. 3

The U.S. Federal Reserve’s aggressive rate hikes in 2018 decimated small-cap stocks like Entercom Communications Corp. (NYSE: ETM).

Shares of Entercom fell nearly 50% from April 2018 through the end of the year.

A nice bounce in January recovered a quarter of that lost value.

But there’s plenty more to come.

Entercom owns and operates radio stations across the United States. With the economy growing solidly, there are more workers in their cars listening to the radio. More listeners increases the value of advertising helping to boost revenue and profits at Entercom.

Analysts are of the same opinion, with estimates for earnings growth in 2019 at a whopping 40%.

With the stock trading for only eight times 2018 estimated earnings, Entercom is poised for big gains in 2019.

Best Small-Cap Stocks to Buy for February 2019, No. 2

For some stocks like Gray Television Inc. (NYSE: GTN), the losses in 2018 came quickly.

From early November to the end of the year, Gray shares lost nearly 30% of their value.

The January effect helped Gray recover half of those losses, but there are still more gains to come.

Now that the U.S. Federal Reserve has backed off on further rate hikes in 2019, investors can put risk back on the table.

Some of the juiciest returns will come in the small-cap space. In the case of Gray, some of the selling may have been justified as analysts see the company taking a step back in 2019 in terms of lower sales and profits.

Still, the valuation is compelling even considering the lower expectations.

Shares trade for only seven times 2018 estimated earnings and 13 times expected 2019 earnings.

That’s a bargain especially when factoring in the potential consolidation in the media space triggered by the dominance of Netflix and Amazon.

Television assets have significantly more value in the current competitive landscape.

That should benefit those buying Gray shares in February.

Best Small-Cap Stocks to Buy for February 2019, No. 1

I have a very basic ideal when it comes to investing in small-cap stocks. I want to own shares of companies that can double in value in one to three years.

That principle makes Tribune Publishing Co. (NASDAQ: TPCO) the best small-cap stock to buy for February 2019.

2018 was a slow bleed for shares of Tribune as the stock lost 30% of its value from the peak to the valley.

The January effect for Tribune was derailed in the middle of the month as the company’s CEO stepped down amidst a management transition announcement.

Failed merger attempts to consolidate the industry have kept a damper on Tribune.

Still analysts expect the company to grow its profits by a very healthy 70% in 2019.

You can buy that growth today for only 23 times 2018 estimated earnings.

Assuming analysts are correct and the company hits $0.92 per share in earnings this year, Tribune will be trading for only 13 times earnings.

Any hint of merger talks – a real possibility in light of the recent offer made by a hedge fund for Gannett – and this stock should double in value over the next three years.

— Jamie Dlugosch

Source: Money Morning