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7 Oversold Small-Cap Stocks With Massive Profit Growth

Tom Taulli

While the markets have made up lots of ground since the steep drop in the fourth quarter of 2018, there are still concerns. The upcoming earnings season could mean negative surprises for investors. Of course, we’ve already seen this with Apple (NASDAQ:AAPL).

Despite all this, there may be opportunities — that is, with small-cap stocks. Based on data from Refinitiv, the projection is for 30% profit gains in 2019.

A big part of this is that the U.S. economy will likely continue to grow (although, it may be at a slower rate). Small-cap stocks should also not be as vulnerable to global market tensions. And yes, there continue to be strong secular growth trends, such as in technologies like cloud computing and AI.

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So then what are the best small-cap stocks to consider now? Here’s a look at seven:


Small-Cap Stocks: Arlo Technologies (ARLO)

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Small-Cap Stocks: Arlo Technologies (ARLO)

Last month, the shares of Arlo Technologies (NYSE:ARLO) got crushed, as the company announced disappointing guidance for the fourth quarter.  During the past three months, the stock price is off by about 41%.

The reason was a delay of its main home security system (called Arlo Ultra). It will now be launched this month.

But for investors looking for an interesting long-term opportunity, ARLO stock does look like a good option.  The company — which recently spun-off from NetGear (NASDAQ:NTGR) — first launched its cameras in late 2014. Since then, ARLO has shipped over 10 million units and there are currently 2.5 million registered users. Note that about 74 million videos are streamed every day.

It’s true that the market is highly competitive, with mega players like Amazon.com (NASDAQ:AMZN) and Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL). Yet the market opportunity is substantial. According to Gartner, the segment is expected to see spending on the connected home to go from $45 billion in 2017 to $146 billion by 2021. This represents a compound annual growth rate of about 34%.


Small-Cap Stocks: Cloudera (CLDR)

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Cloudera (CLDR)

The cloud market has provided lucrative gains for investors during the past few years. But some companies have been left in the dust.

One example is Cloudera (NYSE:CLDR), which operates a platform that helps with analytics and machine learning. Since last year, the shares have plunged from $21 to $11.

But the fortunes of the company could change — and soon. Why? Well, CLDR recently struck a merger with another big data provider, Hortonworks. With this combination, there will be a much richer platform for customers, allowing for hybrid and multi-cloud deployments, better AI and a powerful open-source software footprint.

There will also be greater scale, which will help deal with larger competitors. For example, CLDR will now have over 2,500 customers and annual revenues of $720 million. In fact, this means that the price-to-sales ratio is at about 2.4X, which is fairly low for an enterprise cloud company.


Small-Cap Stocks: Petmed Express (PETS)

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Petmed Express (PETS)

Since its founding in 1996, Petmed Express (NASDAQ:PETS) has built a solid platform — with both the internet and an 1-800 call center — to sell pet medications and other health products. The company is licensed in all 50 states and has 1,000 of its own SKUs as well as 2,000 from third parties.

Now, the company has its issues. After all, there has been pressure on profit margins as the competitive environment has gotten more intense. But it does look like the selling has been overdone. Keep in mind that PETS has a dividend yield of nearly 5% and the forward price-to-earnings multiple is only about 10X.

Wall Street analysts are upbeat too. Note that the average price target is $31. This implies 41% upside from current levels.


Small-Cap Stocks: Varonis Systems (VRNS)

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Varonis Systems (VRNS)

Varonis Systems (NASDAQ:VRNS) is a leader in providing systems for data security and analytics. The focus is on protecting highly sensitive information like customer/patient/employee files, financial records and IP (intellectual property). The company, which was founded in 2005, has 6,350 customers across the world.

Growth has also been solid. During the latest quarter, total revenues grew by 26% to $67.1 million. Even though the company is still unprofitable, there are positive cash flows. They came to $16.3 million for the first nine months of last year. There is currently $158.1 million in the bank.

Varonis’ technology spans many critical technology categories, such as IT operations management, storage management, infrastructure software and data integration. As a result, the addressable market opportunity is enormous. According to the company’s own estimates, its about $15 billion.


Small-Cap Stocks: Talend (TLND)

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Talend (TLND)

When data analytics company Talend (NASDAQ:TLND) went public in the summer of 2016, the shares jumped by 42%. But unfortunately, lately the stock price has come under lots of pressure. Since September, TLND stock has plunged from $71 to under $36.

While the company did have a less-than-stellar earnings report, I still think Wall Street’s reaction was overdone. For the most part, the long-term growth story still looks intact.

TLND builds automation tools for data integration, which has historically been a time-consuming manual process. TLND’s platform, which is called Data Fabric, can integrate data in real-time, allowing for a unified view. This is extremely important for customers since they are spending large amounts on revamping their digital infrastructures.

In terms of growth, even among small-cap stocks it continues to be robust. Based on preliminary estimates, the fourth quarter will see an increase in sales of 33% to 34%.


Small-Cap Stocks: Radius Health (RDUS)

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Radius Health (RDUS)

In the healthcare sector, plenty of small-cap stocks have gotten hit hard during the recent bear move in the markets. But this is typical. Early stage operators usually rely heavily on raising capital. So as markets get more volatile, this puts pressure on companies. But there are many commercial-stage operators that have strong cash balances and growth prospects.  Just look at Radius Health (NASDAQ:RDUS). The company ended 2018 with $235 million in the bank.

RDUS sells treatments for osteoporosis, which is a growing market because of the aging of populations around the world. The lead drug is Tymlos, which has proven to be quite effective. But the RDUS pipeline has other treatments for male osteoporosis and even breast cancer.

Growth has also been running at a breakneck pace. RDUS recently provided guidance that revenues will soar from $95 to $98 million in 2018 to $155 million to $175 million this year.

As for stock analysts, they definitely see tremendous upside, with the target stock price at $36. Currently, RDUS is trading at $16.


Small-Cap Stocks: EverQuote (EVER)

Source: GotCredit

EverQuote (EVER)

Last year, EverQuote (NASDAQ:EVER), a company that operates an online platform to sell insurance, came public.  But life as a public company has been mostly a nightmare for investors. Consider that EVER stock is off about 68%!

The reason: During the third quarter, the company reported a much larger loss than Wall Street expected.

However, the company indicated it will take swift actions to cut back on costs. Oh, and it’s important to note that the growth continues to be strong. Sales for Q3 were up 30% to $41.7 million.

But more importantly, the long-term prospects for EVER do look bright. After all, there is a major shift for insurance companies to allocate their advertising budgets to online platforms. According to EVER, the long-term addressable market could be $120 billion per year. That makes it among the best small-cap stocks to keep an eye on right now.

Tom Taulli is the author of High-Profit IPO StrategiesAll About Commodities and All About Short SellingFollow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

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