Some market components, such as small-capitalization companies, require little coaxing. Whether it’s their potential to produce incredible gains, or the chance to get in early on a burgeoning industry, small-cap stocks present enticing opportunities. While we should all be aware of their highly risky reputation, most investment strategies benefit from their inclusion.
For a start, we must remember the whole point of the investing game: to make as much money as possible in the shortest amount of time. Is this ethos shallow? Perhaps. But this endeavor is about your retirement and your future, and of course, that only affects you. Therefore, you owe it to yourself to find the most profitable opportunities available.
Second, I argue that the current market and economic paradigm incentivize higher risks. Why “old school” conservative strategies may not work is that they assume a stable dollar. Since we’re no longer on the gold standard, inflationary pressure is a near-inevitability. In other words, it’s not enough to be merely profitable — you also must beat inflation for that profit to be meaningful.
Small-cap stocks provide the catalyst for exceptional growth in part because fewer people recognize their presence. Once the general public gets a hold of the news, the low-hanging fruit is usually gone. Of course, little attention can lead to zero attention, so you should be mindful of this double-edged sword.
What exactly do I mean by small-cap stocks? While there’s no set definition, for our purposes, I’ve mostly selected companies with a market cap under $1 billion. These names touch upon various industries, providing you with eclectic options. Sure, they’re high-risk stocks, but in the hands of the smart investor, they’re necessary tools to meet your investment goals.
[Editor’s note: This article was originally published July 12, 2018. It has since been rewritten and republished, and it no longer includes Pioneer Energy, Full House Resorts, Vitamin Shoppe, Digi International, Comtech Telecomm, Craft Brew, Lanett and JCPenney. Please check back often for updates.]
Tetra Technologies, Inc. (TTI)
An equipment manufacturer in the oil and gas sector, Tetra Technologies, Inc.’s (NYSE:TTI) claim to fame is their water-management solutions. With easily-accessible fossil fuels no longer readily available, oil-exploration firms must venture into extreme territory. As a result, finding oil is only half the battle; the other half involves extracting it cleanly and safely.
Since April 9, TTI stock has gained over 27%. However, shares have stayed relatively range-bound since the summer break, which I consider an opportunity. President Trump’s foreign-policy escapades are anything but uneventful. A “stand-out” component of his international strategies is to condemn Iran. That part isn’t unexpected as he’s been a vocal critic of the prior administration’s nuclear deal.
No, what unsettles Wall Street is that Trump is directly combating Iran while cozying up to its arch-rival Saudi Arabia. With that, we can kiss any hope of a nearer-term geopolitical resolution goodbye, along with Iran’s massive oil reserves.
Logically, that means Tetra Technologies should have ample revenue-making opportunities, and this also bodes well for TTI stock.
Aleafia Health (ALEAF)
Legal cannabis is an excruciatingly controversial market segment. Recently, the sector has ramped up the controversy thanks to bonkers move in marijuana-related small-cap stocks. Most notably, Cronos Group (NASDAQ:CRON) is engaged in a tug-of-war between the bulls and bears.
I realize that many analysts and financial writers are skeptical on CRON and perhaps the broader cannabis sector. Without any bad motives on my end, let me respectfully say they’re wrong. Forget the granularity and focus on the bigger picture. We’re talking about a market that previously did not exist now existing. Let that sink in for a minute.
Once you’ve really grasped that concept, consider Aleafia Health (OTCMKTS:ALEAF). I’m going to place my bets on multiple cannabis-related small-cap stocks, but ALEAF caught my attention; therefore, I pulled the trigger.
The ride is going to be volatile. In just a little over two months, ALEAF stock has launched into low-earth orbit. The bears will come and take it down. I’ve accepted that, and when they do, I’ll pick up some more.
Why am I so confident? For starters, ALEAF stock is unencumbered with debt. That’s exceptionally rare for a cannabis play. Second, Aleafia runs the biggest physical medical-cannabis clinic in Canada, with over 50,000 patients. That figure is sure to rise with our northern neighbor’s legalization initiatives. Third, the company operates a fully-licensed production facility in Ontario, targeting a 38,000-kilogram annual-production goal by 2019.
Lastly, ALEAF stock could become registered in the Nasdaq exchange. That opens up the door to major institutional players, potentially sparking paradigm-shattering upside.
OFG Bancorp (OFG)
A massive storm devastated Puerto Rico last year, and another storm this past summer hit the island territory. Naturally, most investors are likely to shy away from any investment associated with the region. While risky, I believe Puerto Rico offers a contrarian opportunity.
An investment I’m considering is OFG Bancorp (NYSE:OFG), which through its Oriental Bank subsidiary is one of the biggest banks in the island. While bigger banks offer greater resources, I love how regional banks like OFG are much more agile to clients’ needs. Management understands their market, especially because they’re part and parcel of their community.
Moreover, regional banks are not encumbered with multiple, and many times competing, interests. A major bank not only has to worry about domestic issues but international pressures as well. Given the wild foreign-policy situation, I’m more comfortable limiting my variables. With OFG stock, you’re not just dealing with an exclusively American institution, but a specific region.
In this day and age, your business is nothing if it doesn’t have an internet presence. Usually, though, companies need much more than just a website. Mobile users steadily represent an increasing market share, and therefore, app development is crucial for long-term success.
That’s where cloud-computing company Appian (NASDAQ:APPN) comes in. One of the company’s specialties is in low-code development. That’s a fancy way of saying that APPN provides a graphic-based platform (instead of manual coding) for users to quickly launch their ideas into a working, viable app.
The compelling story behind APPN stock is obvious. With this platform, business owners, particularly those for smaller companies, don’t have to waste time learning code. Even more problematic, we have hundreds of computer languages floating around. It doesn’t make sense to spend years learning them all, and on top of that, becoming proficient.
APPN stock has a market capitalization of $1.8 billion, which is a bit over my $1 billion threshold. Still, Appian’s core business is so attractive that it’s worth providing an exemption.
QuinStreet Inc (QNST)
If you haven’t already noticed from the successes of companies like Amazon.com, Inc. (NASDAQ:AMZN) or Alphabet Inc (NASDAQ:GOOG,NASDAQ:GOOGL), to thrive in this business environment requires extensive internet knowledge. For those institutions that need a leg-up on the competition, QuinStreet Inc (NASDAQ:QNST) offers the ideal solution.
QuinStreet calls itself a performance-marketing technologies and services company. In lay terms, QNST helps drive customers to their clients’ businesses through various marketing strategies. Furthermore, QNST advertises scalability for their services, providing initial low-cost programs that can grow with their clients. Since internet presence is everything nowadays, a company’s initial investment into QuinStreet can pay serious dividends down the road.
It’s no surprise, then, that the markets have responded positively to QNST stock. On a YTD basis, shares are already up a whopping 61%. I understand that such massive momentum is a killjoy for contrarians. However, the importance of QuinStreet’s expertise will only grow with time.
Finally, check out its financials. While it could use some pick-me-up in the income statement, QNST features a very strong balance sheet. A big highlight is zero debt, which gives management more flexibility for future endeavors.
American Outdoor Brands (AOBC)
Due to the political environment, American Outdoor Brands (NASDAQ:AOBC) was right to change their name. Previously, investors and the general public knew AOBC as Smith & Wesson.
Naturally, folks on the left have an aversion towards firearms due to their association with gun-related crimes. But for millions of shooting-sports advocates, that is a fringe and diabolical use of the platform. I recently had the opportunity to fire the Smith & Wesson Model 500, currently the world’s most powerful production handgun. It was a rain of hate. And it was amazing!
Firearms are just like Harley-Davidson (NYSE:HOG) motorcycles. They represent a component of the American fabric that will never go away. That’s one reason to consider AOBC stock. The other reason is that the Trump administration is under fire, no pun intended.
If the Democrats are able to secure significant victories come November, AOBC is likely to rise. Nothing scares up gun sales than Democrats in power. Even if they fail, you know that the left is salivating, waiting for their turn at the top.
Either way, AOBC stock becomes a fascinating contrarian opportunity.
Vista Outdoor (VSTO)
Recreational-equipment and shooting-sports manufacturer Vista Outdoor (NYSE:VSTO) has long lagged the broader markets. In nearly four years of trading, VSTO stock is down nearly 52%. However, the company is currently riding a bullish, albeit choppy trend channel.
Year-to-date, VSTO stock is up 12%, which isn’t really that impressive. We’re not even a week into October, and already, shares have dropped almost 9%. Plus, painful legislation in California that restricts how ammunition is purchased severely impedes Vista’s ammo revenues. Still, I see light at the end of the tunnel.
VSTO avoids much of the vitriol against gun manufacturers because their Savage Arms subsidiary mostly specializes in hunting rifles. The company did recently start making the maligned AR-15 rifles, but they represent a smaller portion of the brand.
In addition, the political cues suggest a change is coming. The American public is increasingly tired of the never-ending circus act in Washington. We’re probably setting up for a blue sweep in 2020, which should skyrocket VSTO stock.
Q2 Holdings (QTWO)
With a market cap of nearly $2.4 billion, Q2 Holdings (NYSE:QTWO) is another name on this list of small-cap stocks that doesn’t quite fit my definition for the category. Nevertheless, the company is exceedingly relevant, so speculators should take a serious look at it.
QTWO is a software and technology company that specializes in financial services and solutions. As you know, the banking industry has significantly evolved over the prior generation. Today, clients expect not only raw data fed into their mobile devices, but actionable analysis. While an exciting trend, that leaves smaller institutions at a disadvantage.
But with QTWO, these lesser-resourced organizations can better compete with the big dogs. The Q2 platform not only provides core information but also offers behavioral analysis for banking clients. In addition, Q2 integrates advanced security measures in their platform.
QTWO stock is essentially an investment in disruption. That said, its shares have recently become disrupted, shedding double digits since mid-September. In the end, this could be a viable discounted opportunity as Q2’s technology will only increase in demand.
PetIQ Inc (PETQ)
As an animal lover myself, there’s one characteristic of the American public that I absolutely cannot fault: we love our pets! According to a survey conducted by the American Pet Products Association, 68% of our country folk, or approximately 85 million families, own a pet. That’s up significantly from 56% back in 1988, the first year of the survey.
In my view, that’s reason enough to consider buying shares of PetIQ Inc (NASDAQ:PETQ). And let’s also look at this anecdotally: we’ve all seen goofy pet owners dress up their cats and dogs with ridiculous-looking garments. It only makes sense that such adoration for their four-legged friends is a boon for PetIQ, which specializes in pet treats, food, and health products.
If you needed another reason to invest in PETQ stock, consider that millennials are the biggest pet-owning demographic. This is obviously important because they’re also the biggest working demographic, and their earnings power will only increase from here on out.
Plus, millennials will never age beyond 40 years, ensuring an indefinitely robust revenue base.
The major caveat that I have for PETQ stock is that shares have become incredibly wild recently, with soaring highs and devastating crashes. My idea? Let the crazy in PETQ die down before re-engaging. I see a good chance that shares can drop to the high $20 range.
CV Sciences Inc (CVSI)
Medicinal marijuana presents a tricky moral dilemma for conservative Americans. While I respect their views, I must admit difficult in understanding it. Marijuana arouses sharp emotions, primarily because the federal government classifies it as a Schedule I drug. Good people don’t do drugs. But these same folks don’t mind subjecting themselves to weird, pharmaceutical concoctions because an official in a lab-coat prescribed them.
God forbid, if I ever come down with something serious, I want to exercise all-natural options before going the pharmaceutical route. And that’s why I have no issues with companies like CV Sciences Inc (OTCMKTS:CVSI), which strive for disease-cures through cannabis. My thinking – and I’m not the only one – is that something natural has far better longer-term implications than something artificial.
Even if you completely disagree with my logic, the political tide has turned. Last month, Canada became the first G7 nation to legalize recreational weed. Eventually, the U.S. will follow. Primarily, the money is too good, and states with failing financials can give themselves a much-needed boost. Plus, we’ve been down this road before with the Prohibition era.
That didn’t work out so well, and neither will restricting marijuana. I’m liking CVSI stock, and indeed most small-cap stocks in this sector.
Medicine Man Technologies Inc (MDCL)
A key reason why I’m so confident President Trump won’t act harshly on state marijuana laws boils down to politics. As much as Trump proclaims that he’s above public criticism, it’s just not true. Like any person with an outsized ego, POTUS seeks mass adoration. That’s obviously not going to happen, but he’ll evaporate what support he has if he cracks down on marijuana.
While many cannabis advocates feared Trump’s “law and order” mantra, ironically, his sharp rhetoric on this issue stymies him. He’s no dummy. In a little over two years’ time, he’ll need all the support he can get for reelection. Now is not the time for him to take unnecessary risks. But now is the time to consider Medicine Man Technologies Inc (OTCMKTS:MDCL).
Why? Because MDCL offers consultation services across a variety of marijuana subcategories. Whether you’re looking for licensing support to facilities management, Medicine Man has you covered. The current federal law provides MDCL with strong business opportunities due to its conflict with individual state laws.
But if the federal law changes, that too benefits MDCL. “Weedpreneurs” will have several questions and concerns in starting up their companies, and Medicine Man will be one of the few companies that can provide comprehensive solutions.
As with other small-cap stocks, and especially for marijuana stocks, watch the crazy. MDCL is not for the faint of heart. However, the momentum is very positive in the long run, so it is a compelling, albeit risky opportunity.
I’m not going to deny it: I’ve long criticized GoPro (NASDAQ:GPRO). Not to brag, but history has proven me correct. Over the last three years, GPRO stock has evaporated three-fourths of its market value. Usually, that calls for small-cap stocks to sell, not buy.
And yes, GPRO, stock, thanks to its recent bout of volatility, is back into legitimate small-cap territory. Altogether, its shares are worth $931 million, a far cry from its multi-billion dollar heyday. But with such an intense loss of value and interest, does GPRO now become a contrarian buy?
It’s risky as heck, but GoPro has a case here. For one thing, their action cameras are the industry standard: no one comes close to them. That’s always been the case from day one, but they haven’t translated that into market success.
However, this trend could reverse. I’ve noticed more fiscal discipline, with the company driving down their business expenses as well as their research and development. The latter could be risky in and of itself in that GPRO can’t afford to lose its technological edge.
That said, recent revenue data indicates that the company has succeeded in selling robustly across all price channels without cannibalization. Again, GPRO stock is a long shot but I’m willing to change my tune.
Axcelis Technologies Inc (ACLS)
When investors consider technology firms, they usually look for a direct play. For instance, if you’re bullish on graphics-processing units – and you should be – Nvidia Corporation (NASDAQ:NVDA) comes quickly to mind. But we often forget that these companies need other manufacturers to provide the platform for the sexy innovation to occur. Essentially, this is what Axcelis Technologies (NASDAQ:ACLS) does.
Providing equipment for other companies to actualize their innovations may not sound exciting but look at their financials. For a company that has a market cap of only $685 million, management runs a tight ship. ACLS features a strong balance sheet, with a high cash-to-debt ratio being a particular highlight. Also, ACLS levers well-above-average profitability margins against its semiconductor-equipment peers.
The only problem? ACLS stock isn’t getting the job done in the markets, with shares down 31% YTD. I get that Trump’s China tariffs weigh heavily on the tech sector, but the selloff is perhaps overdone.
Admittedly, ACLS stock hasn’t performed to my liking: shares briefly shot up in late July, but it has since fallen off. However, shares have stabilized around the $19 to $20 range since mid-August. If you’re a risk-taker, you should take a long look at Axcelis.
Turtle Beach (HEAR)
Sound card and headset manufacturer Turtle Beach (NASDAQ:HEAR) has a promising business that has lived up to the hype. Since the January opener, HEAR stock skyrocketed 876%. So no, this is absolutely not a company in which you’re getting in on the ground up. Plus, since the beginning of August, Turtle Beach has dropped nearly 37%.
Bearish folks may believe that the run up has gone way ahead of itself. Moreover, Turtle Beach is more or less levered to a commoditized business. At any one point, a competitor can come in and deliver a cheaper alternative. All I can say is, I HEAR you. However, the company has a significant brand advantage.
Modern video-game enthusiasts are no longer the casual hobbyists of yesteryear. Typically, they prefer the best, and Turtle Beach is a renowned name within the industry. Moreover, video gaming is serious business, and some of the most popular titles, such as Fortnite, utilize the company’s technologies.
Granted, HEAR stock is a risky play, but its underlying industry is rock solid. That may be enough for speculators to jump onboard.
Sorl Auto Parts, Inc. (SORL)
Due to a population over four times that of the U.S., China is inevitably the go-to hub for automakers. The lucrative region has aroused fierce competition among the automotive-manufacturing world, as you might expect. But a lesser-appreciated play is the Chinese-automotive parts market. This road has only one direction: up, up and away!
That’s why investors should definitely consider adding Sorl Auto Parts, Inc. (NASDAQ:SORL) to their must-watch list. I’m not the biggest fan of Chinese stocks, let alone Chinese small-cap stocks. But even I can’t deny the revenue-generating opportunities here.
But don’t take my word for it. Sorl levers relatively strong financials, especially in their income statement. Profitability margins for SORL are within the upper echelon of the global auto-parts industry. Over the last three years, the company posted consecutive sales increases. Moreover, the momentum continues, with its most recent quarter delivering a 44% YOY revenue lift to $107.7 million.
The major knock on SORL stock is its current market performance, with shares down 39% YTD. And this is one of those companies for which I had higher hopes. That said, as Chinese GDP per capita rises, SORL becomes increasingly compelling.
National Presto Industries (NPK)
National Presto Industries (NYSE:NPK) is quite likely the most insanely-diversified company ever, and I say that with love. Most people recognize NPK stock as an investment in advanced cookware. Log onto their website, and you’ll come across their innovative products, such as the collapsible multi-cooker, and the electric pressure cooker.
So who would have guessed that NPK is also a defense contractor? I couldn’t believe it at first, and their website makes no mention of their defensive capabilities, for good reason. But in September of last year, the U.S. Army awarded an NPK subsidiary a five-year, $77.7 million contract. The terms? The subsidiary will provide 40mm practice and tactical ammunition.
If you think about it, NPK stock is the perfect Trump investment. With unemployment at multi-year lows, most worker-bees have additional discretionary income. Plus, the increased workload means people are searching for ways to save time.
On the other end of the spectrum, the Trump administration has a very indelicate foreign policy, something that Russian President (and “bromantic” partner) Vladimir Putin recently called out. That means military sales are likely to go up, up, and away!
Barnes & Noble, Inc. (BKS)
During the years before Amazon.com, places like Borders and Barnes & Noble, Inc. (NYSE:BKS) represented the hip places to be. Today, Borders went the way of the Thylacine and the public-phone booth. And while Barnes & Noble still exists, the company is hanging on by a thread. At least, that’s the story we’re led to believe.
Don’t get me wrong: Barnes & Noble is a sharply underperforming company, which makes BKS stock incredibly risky. The brick-and-mortar bookstore has posted several years of declining revenue growth, and spotty earnings. Management has also racked up significant debt relative to its meager cash holdings. Finally, its free cash flow is an on-again, off-again affair.
So why am I including BKS in my small-cap stocks list? While the bookstore industry is on the decline, the worst of it has faded. And it’s not as if people today aren’t reading books, and those that do are often older, educated, and affluent. That’s prime-time demographics!
Of course, the biggest news item surrounding BKS stock is that the embattled company is seriously entertaining buyout offers. That would likely jump shares higher than where they are now. But even if the deal falls through, Barnes & Noble is an intriguing idea.
As I recently argued, the company is more than just a staid bookstore. Management has the chance to build upon their compelling consumer experience. Whether they succeed is a different story, but that’s why BKS is high-risk, high-reward.
Vuzix Corp (VUZI)
Virtual reality and augmented reality used to feature significantly in older science-fiction movies. Today, not only are these technologies commonplace, but their effectiveness has improved dramatically since the concept first launched. However, the challenge is to find consumer appeal beyond a hardcore, niche demographic.
Vuzix Corp’s (NASDAQ:VUZI) foray into VR headsets and especially AR smart-glasses, has produced encouraging feedback and results. For instance, earlier this year, Time.com raved about the company’s Blade AR glasses. In their view, Vuzix could give Alphabet and its Google Glass a run for its money.
But are positive reviews enough to spark a run-up in VUZI stock. I’m compelled to give this organization a chance. VUZI shares are up nearly 25% YTD, while fundamentally, the company features an excellent balance sheet. But you’ll have to watch its income sheet, where the company is consistently losing money.
As for its share price? I concede that VUZI stock has been a disappointment since the start of the second half. That said, we are talking about risky, small-cap stocks. Thanks to its relevant specialty, though, I like Vuzix’s chances of moving substantially higher.
Workhorse Group Inc (WKHS)
Among small-cap stocks, Workhorse Group Inc (NASDAQ:WKHS) is what I call a 50/50 investment. With WKHS, you get direct exposure to an innovative product, the W-15 pickup truck. The W-15 is the first of its kind that’s powered by a plug-in electric motor.
That sounds very exciting, given that electric vehicles are usually luxury affairs. The problem, though, is that Workhorse’s financials are terrible. It’s extremely indebted, and it’s also awash in red ink, earnings-wise. Although WKHS has demonstrated astounding sales growth over the past two years, its most recent quarter showed revenue decline.
The biggest setback is market “performance,” and I use that term very lightly. WKHS has lost over 57% YTD, with most of the pain occurring in August.
Ultimately, the speculative side of my brain wants to give this innovative company a shot. It is, however, a high-risk, high-reward play, so only engage it with money you can afford to lose.
Shotspotter Inc (SSTI)
Gun violence in America needlessly takes the lives of innocent people on a frighteningly frequent basis. Politicians from all sides of the spectrum don’t have solutions, other than “thoughts and prayers.” Fortunately, tech-firm and “feel-good” company Shotspotter Inc (NASDAQ:SSTI) has a far more substantive solution.
According to their website, 80% of gunshot incidents never reported to law enforcement. That leads to untold consequences, the most significant being shooting-victim deaths. To combat this alarming gap, Shotspotter makes gunshot-detection systems, facilitating faster response times to firearms-related crimes.
Law-enforcement agencies have responded enthusiastically to the system, with SSTI recording consecutive sales growth in the last three years. The company also maintains a strong balance sheet that’s unencumbered with debt.
Because of its incredible and potentially life-saving utility, SSTI has gained Wall Street’s attention. On a YTD basis, SSTI is already up an amazing 275%. While Shotspotter certainly isn’t on discount, the need for their product is patently obvious.
As of this writing, Josh Enomoto is long ALEAF stock.