Big companies tend to dominate the financial headlines, but there are lots of opportunities for investors who are willing to think small.
We asked a team of Motley Fool contributors to each highlight a small-cap stock that they think is a great buy right now. Here's why they called out CannTrust (NYSE: CTST), BlackLine (NASDAQ: BL), and CRISPR Therapeutics (NASDAQ: CRSP).
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Capitalizing on cannabis
Todd Campbell (CannTrust): Marijuana mania associated with legalization has sent some of the top pot stocks soaring to sky-high valuations, but there are some relative bargains still, including CannTrust, a Canadian cannabis company that has a good shot at being one of the country's biggest players.
CannTrust hasn't announced its fourth-quarter financials yet, so we still need to wait to see how it fared following Canada's recreational-market opening in October. Nevertheless, its prior quarter's production and revenue match up nicely to more expensive and better-known peers, including Tilray (NASDAQ: TLRY) and Cronos Group (NASDAQ: CRON).
Q3 2018 Cannabis Comparison
Source: Corporate filings. Revenue in Canadian dollars. Market cap in U.S. dollars.
After recreational sales began in Canada on Oct. 17, adult-use sales totaled $152 million Canadian ($113.26 million) in the fourth quarter, according to Statistics Canada. That has caused sales at CannTrust's competitors to spike. It wouldn't surprise me if CannTrust holds its own against these peers when it reports fourth-quarter financials on March 28. If so, then its shares could be a bargain given that its market cap is much smaller than Tilray's and Cronos Group's.
Even if CannTrust stutters short term, I think it could be a big long-term winner. It's targeting 100,000 kilos in annualized marijuana production, and it boasts enviable gross margins thanks to extracts accounting for over 50% of its third-quarter sales. Since Canadians spend $6 billion per year on marijuana, and sales are only beginning to move from the black market to the legal marketplace, I think CannTrust is a fast-growing company trading at a discount to its peers that's worth buying.
Automating the back office
Brian Feroldi (BlackLine): Technological advances have made lots of processes faster, cheaper, and easier, but there are still lots of areas that are ripe for disruption. Consider the average accounting department: It is still a standard protocol to process huge batches of data at the end of a specified length of time (usually a month). This standard workflow creates a boom-or-bust cycle for accountants that leads to long hours, lots of repetition, and predictable periods of frustration.
An innovative software company named BlackLine has decided to tackle this problem head-on. BlackLine offers software that collects accounting data from dozens of sources and then automatically processes it, nearly in real time. This helps to smooth out the roller coaster workload and allows more focus on accuracy and bigger-picture tasks.
BlackLine's software is currently being used by more than 2,600 customers around the world, and more are signing up every day. The company continues to roll out new solutions that can be cross-sold to its current customers, too. This combination helped drive 30% combined revenue growth in 2018, and the company recently become profitable.
BlackLine has come a long way since it was founded in 2001, but the opportunity ahead is still massive. The company estimates that its services could eventually be adopted by more than 165,000 companies around the world, and that its annual revenue opportunity is more than $18 billion. That's a huge number when compared with the $228 million in total revenue that it pulled in during 2018.
BlackLine's stock isn't particularly cheap right now, as shares trade for more than 11 times sales and 164 times next year's earnings. But I think that its premium is easily justified by its estimated profit growth of 50% over the next five years. If the company can deliver on that target, then its current market cap of $2.6 billion will probably look very small in just a few years' time.
Likely the next level of medical breakthroughs
Chuck Saletta (CRISPR Therapeutics): One of the biggest recent breakthroughs in medicine is the ability to leverage the body's own immune system to better fight off illness and disease. The early successes there make it clear that helping the body get better at that all-important job can be an incredibly powerful way to help people live longer, healthier lives.
Now imagine taking that ability to the next level by being able to directly reprogram the DNA inside cells to carry out new or enhanced functions. That's the promise that CRISPR Therapeutics is working to deliver. Its research therapy on sickle cell and beta-thalassemia is into clinical trials. If successful, it can potentially provide a lifetime of relief to the approximately 360,000 people each year born with those debilitating diseases.
A separate study has shown the CRISPR technology capable of treating mice afflicted with type 1 diabetes. The company also believes that its technology can rapidly speed the time for cancer immunotherapies to be delivered to patients once they're diagnosed and need the treatment.
Cancer, diabetes, and sickle cell disease are three huge problems that current medical treatments haven't figured out how to cure. CRISPR Therapeutics' research into gene editing shows potential in the fight against all three of them, making it potentially one of the most revolutionary medical breakthroughs of all time.
Despite that potential, the company's market capitalization currently sits at around $1.9 billion, valuing it at less than the annual revenue of some individual blockbuster pharmaceutical compounds. This is because CRISPR's therapies are still in the research and clinical treatment phase, and they won't see significant revenue until they've been proven and approved.
Still, that uncertainty makes now a great time to consider buying CRISPR Therapeutics. If its technologies prove successful, the market will likely quickly revalue its shares upward based on that success, rewarding investors who got in while the uncertainty was still high. There is significant risk involved given that the company is currently burning through cash, but the potential reward may well wind up being worth that risk.
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Brian Feroldi owns shares of BlackLine, Inc. Chuck Saletta has no position in any of the stocks mentioned. Todd Campbell owns shares of CannTrust Holdings Inc and Cronos Group Inc. The Motley Fool owns shares of BlackLine, Inc. and CRISPR Therapeutics. The Motley Fool recommends CannTrust Holdings Inc. The Motley Fool has a disclosure policy.