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2 Top Small-Cap Stocks to Buy in January

Joe Tenebruso, The Motley Fool

Small-cap stocks, typically defined as those with market capitalizations of between $300 million and $2 billion, can deliver explosive gains, if you choose wisely.

Choose wrong, and you can suffer brutal losses, up to and including a complete loss of your capital if the business you invested in fails. But choose correctly, and you can make many multiples of your original investment.

That's why it's so important to focus on the best small companies -- those with strong competitive positions in massive growth markets. To help you in this regard, here are two of the best small-cap stocks available in the market today.

A compass pointing toward the word growth

Image source: Getty Images.

The software star

Appian (NASDAQ: APPN) is a leader is "low-code" software development. Its tools help companies build their own applications faster and cheaper than they can do on their own. In fact, the company recently began offering "The Appian Guarantee," which promises to deliver a fully functioning app in just eight weeks. 

"We continue to demonstrate that our platform is the most accessible in the market," founder and CEO Matt Calkins said in the company's third-quarter press release. "More companies are finding us to be the fastest way to build and deploy unique software to run their business." 

Appian is gaining customers at a rapid clip, and it has tremendous room for growth still ahead. Its customer count totaled only 356 as of Dec. 31, 2017, but Calkins believes that Appian's clients could potentially number in the "hundreds of thousands." That's because demand for low-code software development is likely to increase significantly in the coming years, as more companies come to understand its cost and ease of use advantages over traditional forms of software creation.

Moreover, Appian already estimates its addressable market at over $30 billion. This represents a massive growth opportunity for the low-code software leader, which expects its revenue to rise by more than 25%, to approximately $222 million, in 2018. 

Better still, recent market pessimism has driven Appian's stock nearly 30% off from its highs of the past year. Now, with its market cap checking in at just under $2 billion, Appian's shares offer long-term investors the prospect of multibagger-type returns, if it can deliver on its incredible growth potential. And that makes its stock a great buy today.

The recent IPO

Upwork (NASDAQ: UPWK) operates the leading global online marketplace for freelancers. In the past year, more than 475,000 clients used Upwork's platform to hire over 375,000 freelancers in 180 countries. The company processed $449 million in gross services volume (GSV) -- the total amount of business transacted on its platform -- in just the third quarter alone. That represented year-over-year growth of 27%.

Despite its market leadership and impressive growth, Upwork remains in the early innings of its worldwide expansion. The company's current GSV accounts for just a tiny fraction of its addressable market, which management pegs at $560 billion. This market is expected to grow rapidly in the coming years. In fact, research firm McKinsey Global Institute predicts that online talent platforms like Upwork could add as much as $2.7 trillion to global GDP by 2025. 

Upwork's stock has only been available to public investors since October. It closed its first day of trading at $21.18, well above its IPO price of $15. Yet after reporting earnings that were slightly below Wall Street's expectations, Upwork's stock can now be had for less than $19 per share. That equates to a market cap of $2 billion, which I'd argue drastically understates Upwork's massive market opportunity. This mispricing represents an intriguing profit opportunity for patient, long-term investors -- and those who buy today should be well rewarded in the years ahead.

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Joe Tenebruso has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Appian. The Motley Fool recommends Upwork. The Motley Fool has a disclosure policy.