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3 Top Small-Cap Stocks to Buy in May

Demitrios Kalogeropoulos, Nicholas Rossolillo, and Daniel Miller, The Motley Fool

Volatility has jumped back into the market in early May, and while those price churns can be stressful for investors, they often can result in good buying opportunities, particularly for smaller stocks.

With that potential in mind, we asked Motley Fool contributors for small-cap investment ideas that seem attractive today. Read on to see why Appian (NASDAQ: APPN), Dave & Buster's (NASDAQ: PLAY), and Weight Watchers International (NASDAQ: WW) topped that list.

More than just a game

Demitri Kalogeropoulos (Dave & Buster's): Restaurant and entertainment chain Dave & Buster's books only about $1.3 billion of annual revenue, but that number could grow significantly over the next decade to power market-thumping returns for patient investors. The company recently announced its first increase in comparable-store sales in over a year thanks to menu improvements and a popular all-you-can-eat chicken wings offering. Dave & Buster's is seeing spiking demand for its exclusive virtual reality gaming titles, too -- so much so that the company is raising prices on experiences like Dragonfrost VR and Jurassic World.

A man and a young child play arcade games.

Image source: Getty Images.

While the gaming wins could elevate profitability over the next few years, the more encouraging prospect for investors is the chain's growth potential. Dave & Buster's is planning to add a record 16 stores to its base in 2019 and continue expanding its footprint at about 10% each year. That pace would roughly double its store count in a few years to land near the 251 locations that CEO Brian Jenkins and his team believe the market will eventually support. Its latest growth acceleration suggests that ambitious target might be achievable, and it implies there's a clear path for growth that relies on Dave & Buster's delivering food and entertainment experiences that rivals just can't match.

A cloud software developer takes a step back

Nicholas Rossolillo (Appian): Shares of low-code software developer Appian recently took a double-digit tumble after first-quarter 2019 results and guidance came in lower than expected. Investors were disappointed with business to kick off the new year: Combined revenue was up only 15% from the year prior to $59.6 million, with software and subscription services up 30%. Adjusted operating losses totaled $10.2 million, worse than the $8 million loss in the first quarter of 2018.

Appian is still a very small company, and its user-friendly, no-software-coding-expertise-required platform is just getting started. The recent share-price pullback could be great timing to get in on an up-and-coming enterprise cloud provider -- its valuation is only $2.1 billion. There's a lot of runway ahead for the low-code industry. According to research conducted by Forrester Consulting, companies that have turned to low-code development have quickly realized return on their investment and plan on using the toolkit for future projects.

The migration to low-code is what's driving Appian's software and subscription segment, and the company expects that trend to continue. Second-quarter and full-year 2019 growth is anticipated to be at least 35% and 30%, respectively. However, total revenue growth is getting dragged down by the professional services segment -- which still makes up over 40% of total sales, carries low profit margins, and is unpredictable as far as timing of payment. That's the likely reason for the most recent pullback.

Nevertheless, it's the faster-growing, high-profit-margin software and subscription segment that's the real reason to own Appian. Gross profit for the segment was an impressive 89.7% in the first quarter and is still going at a clip of over 30%. It will likely become the sole driving force for the business in the coming years. Thus, the recent pullback looks like a good time for those who want in on the low-code movement for the long haul.

Slimming down for a rebound

Daniel Miller (Weight Watchers International): If you're browsing the market for some top small caps to buy in May, Weight Watchers could be at the end of a nearly yearlong spiral lower and poised to rebound.

WW Chart

WW data by YCharts.

2019 was billed as a slower year for WW after management admitted the rebranding of the company may have cost it some momentum, despite believing the new direction being the correct decision long term. And while the soft start to a critical winter season seemed to confirm the sluggish outlook, WW's recently reported first-quarter results offered a glimmer of hope that 2019 could end up better than expected. WW's first-quarter recorded a loss of $0.16 per share, which was much narrower than the loss of $0.26 per share analysts had expected. Despite the loss, there were a number of improved trends such as a 1% growth in subscribers to 4.6 million, total paid weeks increasing 4% compared to the prior year, and management bumping its full-year guidance. Earnings per share are now expected to land in a range of $1.35 to $1.55, up from a prior estimate of $1.25 to $1.50.

A person stands on a bathroom scale.

Image source: Getty Images.

With the first-quarter results offering a glimmer of hope for investors, and perhaps a bottom for the stock price decline, management is focused on increasing member recruitment and retention, as well as improving its costs throughout 2019. One example aimed at helping recruitment and retention was the recent launch of its "Gamechanger" advertisement featuring Oprah Winfrey explaining the WW app and how it has helped her wellness journey. Shares popped 20% when WW released first-quarter results, but the stock still has a long way to go if the company beats expectations in 2019. If management executes with cost-cutting and member retention, it could be a smart idea to jump back on board in May.

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Daniel Miller has no position in any of the stocks mentioned. Demitrios Kalogeropoulos has no position in any of the stocks mentioned. Nicholas Rossolillo owns shares of Appian. The Motley Fool owns shares of and recommends Appian. The Motley Fool recommends Dave & Buster's Entertainment. The Motley Fool has a disclosure policy.