This Small-Cap Stock Is Cheap and Growing Fast. It’s Time to Buy.

The heating system comes from a small industrial company called nVent Electric (ticker: NVT), and its stock is ready to heat up, too. NVent is an electrical component maker, and it makes surge and heat protectors for electrical infrastructure, as well as products corralling all the cables and wires running through homes and businesses. While its stock, at Friday’s close of $34.72, is down 8.6% this year, the company is benefiting from the growth of automation, data centers, and sensors for monitoring complex systems—anything, really, that is electrified.

“They have leverage to all of the themes/mega-trends that should be relatively long growth drivers, like the electrification of everything,” says RBC Capital Markets analyst Deane Dray.

NVent has only been a publicly traded company since 2018, when it was spun out of Pentair (PNR), a move that was catalyzed, in part, by activist investor Nelson Peltz’s Trian Fund Management. Investors likely hoped that more deals were in the works—perhaps even the sale of nVent to another company—but those hopes were dashed when Trian’s representative left the board in 2020.

Instead of financial engineering, nVent has been introducing new products in areas where the company is strong, such as thermal and electrical protection and electrical enclosures. It’s also been expanding globally, with non-U.S. and Canadian sales growing to about $900 million—37% of total sales—in 2021, up from $760 million or 34% in 2018.

“We’ve had a strategy since we became a new company, and I always like to say [that] our strategy has been working,” CEO Beth Wozniak said at an investor conference in February.

The balance sheet can support that strategy. In an emailed statement from the company, CFO Sara Zawoyski says: “We exited 2021 with a net debt to adjusted Ebitda [earnings before interest, taxes, depreciation, and amortization] ratio of 2 times, at the low end of our target range of 2 to 2.5. Our robust balance sheet and cash generation puts us in a great position to invest in growth and continue to execute on our M&A strategy to drive attractive returns for shareholders.”

Coming into the year, investors feared supply-chain problems would hobble growth. But nVent is likely to generate almost $2.7 billion in sales in 2022, about 9% above 2021’s, with earnings per share set to grow 11%. The figures are likely to rise another 5% and 10%, respectively, in 2023. That compares with annual gains of 4% and 3% for sales and EPS from 2018 to 2021.

“Can you believe we used to worry about growth?” asked Wolfe Research analyst Nigel Coe back in February after the company reported its fourth-quarter numbers.

Nonetheless, nVent, with a market cap of $5.7 billion, trades around 16 times estimated 2022 earnings, a discount to the S&P 500’s 20 times and the 18 of similarly sized industrials in the small-cap Russell 2000 index.

That’s also cheap for a company of nVent Electric’s quality. Its adjusted operating profit margin, at 15%, is about four percentage points better than those of other small- and mid-cap industrials. Coe argues that the company could ultimately fetch 20 times his 2022 EPS estimate of $2.20, or $44 a share. But even if the multiple doesn’t expand, the stock should still be worth at least $38 in a year.

NVent also has a wild card—the possibility that it will be taken over. Investors hoping for more corporate actions to generate value were disappointed when Trian left, but some larger electrical-equipment suppliers might seek to fill out their product lines as electrification trends accelerate. NVent would slot in nicely inside some larger electrical companies, including Eaton (ETN), ABB (ABB), Schneider Electric (SU.France), and Hubbell (HUBB), says RBC’s Dray.

It’s just one more reason nVent’s stock could electrify investors’ returns in coming years.

Write to Al Root at allen.root@dowjones.com