3 Small-Cap Stocks to Scoop Up Before the New Year
The Dow Jones Industrial Average hit a market low on March 20, 2020 as the pandemic gripped the country. Afterwards it went on an amazing bull run that, despite last year’s bear market, still saw the venerable index gain 90%. The S&P 500 did even better, doubling in value over the past three and a half years or so, which meant great things for high-potential small-cap stocks.
What most people don’t know is that small-cap stocks did even better. The S&P 600 index, a broad cross-section of small companies in the market, returned almost 102%, just edging out the performance of the 500 biggest stocks trading today. Small caps typically outperform their larger brethren over time. That’s why investing in high-potential, small-cap stocks is a viable investment strategy for most investors.
Yet in 2023 the S&P 600 is up just 5% compared to a near-20% gain by the popular large-cap benchmark index. That means small caps are offering a better risk-reward ratio right now than bigger companies. What follows are three super small caps you will want to buy before the end of the year.
InvestorPlace - Stock Market News, Stock Advice & Trading Tips
Redfin (RDFN)
Source: Sundry Photography / Shutterstock.com
Choosing a real estate stock like Redfin (NASDAQ:RDFN) out of the gate is definitely a contrarian play. The real estate technology company says 2023 was the least affordable year to buy a home in at least the past 11 years. Buyers were spending an average of 41% of their income on a median-priced home’s monthly payment, far above the 30% rule of thumb usually employed. That’s the highest share on record.
Inflation, coupled with the rapid increase in interest rates, took a toll on the housing industry and on Redfin’s stock. Shares are down 91.6% from an all-time high in February 2021. Though the shares have more than doubled off last month’s bottom, there is good reason to believe the shares can keep rising.
Redfin is a residential real estate brokerage offering buyers and sellers a discount on listing fees. It charges just 1%, or about half of what typical brokerages charge. Although a deteriorating housing market should impact operations, Redfin remains resilient regardless. It reported an 8% increase in gross profit to $98.3 million even as revenues tumbled 12% to $269 million. CEO Glenn Kelman said, “This downturn has only made us stronger.”
Housing market trends are set to reverse in 2024 as interest rates peak. The demand for homes remains high, and more users are accessing Redfin’s site. Trading at a fraction of sales and a deeply discounted 3 times free cash flow, Redfin is an option in high-potential small-cap stocks you want to scoop up now.
Tilray Brands (TLRY)
Source: rafapress / Shutterstock.com
Marijuana has been a lousy investment the past few years, but you should still consider buying Tilray Brands (NASDAQ:TLRY) before 2024 begins. There remains a high probability Germany will legalize the recreational use of cannabis in early 2024 and with Tilray’s European operations headquartered in Densborn, Germany, it will be a big beneficiary.
Certainly, like legalization efforts in other places, it always involves taking two steps backward before allowing one step forward. A vote on legalization was scheduled by Germany’s legislature or this week. However, last-minute changes to the bill scuttled the vote. They now anticipate voting in early 2024 with the law going into effect in April.
Germany is already the largest medical marijuana market in Europe. Recreational use, whether from in-country cultivation or through allowing imports, will benefit Tilray’s bottom line. Its Aphria RX facility is located in Germany while it has an EU-certified good manufacturing practices (GMP) production facility in Portugal. Tilray’s distribution platform already gives it access to 13,000 pharmacies in Germany.
The real profit lever for Tilray, of course, will be marijuana legalization in the U.S. That process is moving at an even slower glacial pace, but because Tilray diversified its business beyond just the Canadian market, it should be a big winner from such efforts everywhere they occur.
The stock is down 30% year-to-date but there is substantial short interest in the company. Investors have shorted more than 16% of outstanding shares. The short interest ratio, or the number of days it would take short sellers to cover their position, is 10. Consider anything beyond seven days a significant amount. That provides both short- and long-term catalysts for buying Tilray Brands’ stock now.
American Water States (AWR)
Source: HQuality/ShutterStock.com
Water utility American States Water (NYSE:AWR) is also a top stock for year-end shoppers. It provides clean water and electricity primarily to Southern California, but also has over 1 million customers across nine states while serving 11 military bases under 50-year contracts with the U.S. government.
American States Water was founded a month after the stock market crash of 1929. It began paying a dividend in 1937 and started consistently raising the payout in 1955. It’s now done so for 68 straight years, making it one of just three Dividend Kings with such a long track record (the other two are Genuine Parts (NYSE:GPC) and Procter & Gamble (NYSE:PG).
Utility stocks attract investors because they perceive them as premium dividend payers. The regularity and stability of the payments make them lower-risk, defensive plays. Utilities typically feature healthy cash flows and stable dividends. Especially during down markets, utilities keep right on paying shareholders.
Water stocks are utility investments on steroids because clean water and wastewater treatment are essential, non-negotiable requirements for healthy living. They continue to grow no matter the conditions. If the economy grinds into a recession next year as many economists now predict, American States Water is a utility stock you want to have in your portfolio today.
On the date of publication, Rich Duprey held a LONG position in AWR, GPC and PG stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Rich Duprey has written about stocks and investing for the past 20 years. His articles have appeared on Nasdaq.com, The Motley Fool, and Yahoo! Finance, and he has been referenced by U.S. and international publications, including MarketWatch, Financial Times, Forbes, Fast Company, USA Today, Milwaukee Journal Sentinel, Cheddar News, The Boston Globe, L’Express, and numerous other news outlets.
More From InvestorPlace
Musk’s “Project Omega” May Be Set to Mint New Millionaires. Here’s How to Get In.
The #1 AI Investment Might Be This Company You’ve Never Heard Of
The Rich Use This Income Secret (NOT Dividends) Far More Than Regular Investors
The post 3 Small-Cap Stocks to Scoop Up Before the New Year appeared first on InvestorPlace.
