U.S. Markets closed

3 Small-Cap Stocks With Big-Cap Potential

Nicholas Rossolillo, Anders Bylund, and Todd Campbell, The Motley Fool

Change can be stressful, and today's technology-forward environment means change is happening often and at a fast pace. Where some see instability, though, investors see opportunity. 

Most small businesses don't make it, getting either gobbled up by larger peers or steamrolled by innovation. But for a select few, a world in flux means opportunity to exploit new trends and expand. Getting in on such small stocks can mean big returns down the road. Here are three that our Motley Fool contributors think have big potential: Upwork (NASDAQ: UPWK), Inseego (NASDAQ: INSG), and HEXO (NYSEMKT: HEXO).

Put some of the "gig economy" in your wallet

Nicholas Rossolillo (Upwork): For most Americans, "work" is still a four-letter word that means commuting to a job, putting in a set number of hours, and receiving a paycheck in exchange for said time. For a growing number of individuals, though, work -- or at least a part-time side hustle -- doesn't fit within that convention. Flexible or freelance work, often found or done on the internet, is on the rise.

Some estimates put as much as a third of the U.S. workforce into what's become known as the "gig economy." Yet the gig industry is still very fragmented, and many freelancers still find work haphazardly. Upwork is trying to change that. The company operates an online network that matches workers with projects and jobs and provides other value-added services to both businesses and the people who can fulfill business needs.

In spite of the size of the gig economy, Upwork is still very small -- currently carrying a market cap of just $1.6 billion. The stock is down some 25% since its public debut in the fall of 2018, but that isn't because the business is shrinking. On the contrary, revenue increased 16% year over year during the first quarter of 2019, and full-year revenue is expected to rise at least 18% to $299 million.

Some of the downbeat mood surrounding the stock has to do with a recent slowdown in the business' trajectory -- 2018 revenue grew 25% -- and the fact that Upwork isn't yet profitable. However, guidance for 2019 implies things will pick up steam again soon, and the company expects to at least break even this year when backing out stock-based compensation and other one-time items. Nevertheless, this small company is not for the faint of heart, but as the workforce continues to evolve with the digital age, Upwork is in a prime position to benefit.

A group of people sitting on a bench holding smartphones, tablets, and laptops.

Image source: Getty Images.

A clean bet on 5G wireless and the Internet of Things

Anders Bylund (Inseego): So you expect 5G wireless technologies to shake up the telecom and general IT markets around the world. Cool. I agree. But you don't know how to separate the winners from the less fortunate wannabes as the 5G revolution rolls out. OK. What if I told you that you don't have to pick a winning telecom or enterprise computing giant to profit from the 5G boom? Inseego looks like a slam-dunk winner in this sea change, no matter what the big boys end up doing.

This company provides cloud computing and advanced networking solutions for businesses both large and small. Already a leading supplier of 4G wireless connectivity solutions for the current generation of the Internet of Things, Inseego is keeping a hungry eye on the 5G-powered opportunities coming up next.

Analyst firm Cowen expects Inseego to harvest average revenue growth of roughly 20% per year over the next five years, valuing Inseego's stock at nearly 80% above its current price.

Inseego is unprofitable today alongside negative free cash flows. Those details are deal-breakers for some investors, which is why the shares are valued at just 1.8 times trailing sales or 17 times forward earnings estimates. This $359 million micro-cap company is poised to explore a brand new target market of epic proportions.

A marijuana bargain in the making?

Todd Campbell (HEXO): Canada's recreational-marijuana market captured over 10% of total marijuana spending in Canada during the fourth quarter, but sales in January and February were below December's pace, and that's left marijuana investors scratching their heads as marijuana stocks like HEXO have sold off.

While there's no guarantee that legal, adult-use sales will reignite, improving supply could rekindle demand. We may already be seeing that happen, given March's adult-use revenue set a new one-month high. More needle-moving would be the approval of value-added products for the recreational market, including vapes and edibles. A decision on those products is expected later this year.

If recreational sales accelerate, I think HEXO will be one of the industry's big winners. The company's marijuana production surged to 9,804 kilos last quarter, up 98% quarter over quarter, and infrastructure coming online is expected to increase annual production to about 150,000 kilos.

The upcoming production increase has HEXO maintaining an outlook for sales of $400 million in fiscal 2020. That would be a remarkable increase from its existing annualized rate of about CA$64 million. If the company executes on that goal, then HEXO's current $1.45 billion market cap may make its shares one of the industry's biggest bargains right now.

More From The Motley Fool

Anders Bylund has no position in any of the stocks mentioned. Nicholas Rossolillo has no position in any of the stocks mentioned. Todd Campbell has no position in any of the stocks mentioned. The Motley Fool recommends HEXO and Upwork. The Motley Fool has a disclosure policy.