10 Small Caps Punching Above Their Weight
They may be tiny, but they pack a wallop
The last few weeks have been tough for the broad market. With more questions remaining as to the future for overbought and overvalued stocks, the next few weeks may be just as frustrating.
Here’s the solution: Stay out of mainstream large-cap names!
Large-cap stocks carry more than their fair share of the market’s weight (for better or worse). Off-the-radar small-cap stocks are generally better shielded from well-known brands that rise and fall at the drop of the hat. There’s less of a story coupled with the typical small cap, which means there’s less emotionally-driven volatility.
Don’t know where to start? No problem. Here’s a rundown of some of the market’s most underappreciated small-cap players.
Although they’re certainly not immune to the occasional volatility all stocks can dish out, these stocks are more likely to more consistently reflect their underlying fundamentals, or their company’s growth prospects.
Small-Cap Stocks With Huge Potential: The Brink’s Company (BCO)
There will undoubtedly come a time when the world no longer uses cash. The rise of bitcoin and other blockchain-based instruments, even if they’re not built to last, validate the technology and point the way.
That time is a long, long way down the road though, and in the meantime, the world is still going to need armored trucks and armed guards to haul large chunks of cash around. That puts a very familiar The Brink’s Company (NYSE:BCO) at the top of a list of small-cap stocks to buy.
No, the company won’t likely ever dish out jaw-dropping growth. Slow and steady wins the race though. This year’s expected revenue growth of 8% and next year’s expected revenue growth of the same pace — and the similarly-projected improvement in earnings — sets the stage for a strong performance from the stock.
Small-Cap Stocks With Huge Potential: U.S. Concrete, Inc. (USCR)
Are you a believer in the Trump-driven economic boom? Moreover, have you noticed that infrastructure spending is the one thing Trump, the GOP and the Democrats can all agree on?
If that’s the case, put U.S. Concrete, Inc. (NASDAQ:USCR) on your watchlist if not in your portfolio.
As the name suggests, U.S. Concrete is a U.S.-based concrete supplier … and there aren’t many of them. Yes, last quarter’s results fell short of sales and earnings expectations. Take a closer look at the numbers, though.
Revenues were up 7%, and its adjusted earnings figures were still solid. Better still, sales are expected to grow nearly 15% this year, driving per-share profits to $5.10 in 2018 and then to $6.48 per share for 2019. That translates into a forward-looking price-earnings ratio of less than 10.
Small-Cap Stocks With Huge Potential: CACI International Inc (CACI)
CACI International Inc (NYSE:CACI) isn’t exactly a household name. Indeed, it’s likely that most investors have never even heard of it. That unfamiliarity is an advantage to those few who are willing to do a little homework on small-cap stocks, though.
In short, CACI International is a military contractor. It doesn’t make anything as high-profile as the F-35 fighter jet or aircraft carriers, but it’s absolutely instrumental to our nation’s military. It offers cybersecurity and command/control solutions, as well as a few other products and services.
Those who know CACI might be concerned that it’s on the cusp of a nasty bidding war for government IT contractor CSRA Inc (NYSE:CSRA). General Dynamics Corporation (NYSE:GD) thought it had CSRA in the bag, but CACI made a better offer.
Thing is, though it may end up paying a frothy price for it, the letter to CSRA shareholders made a valid point when it explained: “A CACI-CSRA combination has inherent cultural compatibility and will reshape the federal IT solutions and services market in a way the GD transaction cannot.”
Small-Cap Stocks With Huge Potential: Flotek Industries, Inc. (FTK)
While the price of crude oil will rise and fall, taking drillers and explorers with it, there’s one sliver of the energy market that’s (almost) always en vogue. That’s the oil services arena and the companies that can improve the yields of oil fields in particular.
Enter Flotek Industries, Inc. (NYSE:FTK). This company has developed some advanced chemistries that help drillers get the most out of their reserves. The company booked a loss for 2017.
That’s expected to change this year though, with analysts calling for a swing from last year’s per-share loss of 10 cents to a profit of 23 cents this time around, to be followed by a per-share profit of 38 cents next year.
Small-Cap Stocks With Huge Potential: iRobot Corporation (IRBT)
You know the company, even if you don’t know you know the company. iRobot Corporation (NASDAQ:IRBT) is the company that makes the Roomba vacuuming robots.
It’s a surprising success story. Not only are these automated vacuum cleaners a bit expensive, a handful of cheaper knockoffs (and it’s a form-factor and function that’s relatively easy to copy) have made their way into the marketplace. Successfully defending its IP has been a big part of that persistent domination, as Black & Decker now knows. And Black & Decker isn’t the only rival that’s learned about iRobot’s patents the hard way.
It’s not a cheap stock, and IRBT shares lost more than 20% last month following a full-year profit forecast that was less than hoped. Traders balked. There’s a good reason for the disappointing guidance, though … iRobot is spending to make sure it remains the dominant name in the robotic vacuum arena.
Small-Cap Stocks With Huge Potential: Materion Corporation (MTRN)
There’s no sense in beating around the bush: Materion Corporation (NYSE:MTRN) is a boring company. It just doesn’t matter.
Materion makes specialty materials, ranging from alloys to ceramics to film coatings and more. The average layperson couldn’t name or explain anything on its menu. But, the average layperson would certainly be frustrated if its products weren’t available.
For instance, it makes the materials used in the fabrication of plastic moldmaking. Its aluminum beryllium ‘AlBeMet’ alloy is going to be used in a long-range sensor installed on an unmanned military drone.
Those and comparable projects, obscure as they may be, lay the groundwork for more slow and steady earnings and revenue progress.
Small-Cap Stocks With Huge Potential: Paycom Software, Inc. (PAYC)
Not that past performance is a guarantee of future results, but generally speaking, past performance is a pretty good indication of a company’s future potential.
With that as the backdrop, the fiscal fourth-quarter report from Paycom Software, Inc. (NYSE:PAYC) was a serious head-turner. Revenue grew 30% year-over-year to $114 million, and per-share earnings were up 61% to 29 cents. Better yet, analysts were only calling for a profit of 24 cents per share and a top line of $113 million. It may be a hint that analysts still underestimate the company.
Paycom Software, by the way, offers human resources and payroll processing software. With the hiring picture looking better and wages on the rise, companies are going to feel pressured to manage their workforce better as well as more cost-effectively. That plays right into Paycom’s hand.
Small-Cap Stocks With Huge Potential: IPG Photonics Corporation (IPGP)
Technically speaking, IPG Photonics Corporation (NASDAQ:IPGP) isn’t a small cap. It’s not even a mid-cap stock. In fact, its recent addition to the S&P 500 qualifies it as a large cap. It’s in the spirit of a small-cap stock, though, in that it’s obscure and nobody really knows about it.
In short, IPG Photonics makes industrial lasers and fiber-optic equipment. The former is used for things like micro-welding and cutting, while the latter is used by the telecommunications industry. The advent of data-intensive IoT and “Big Data” itself — not to mention a limited amount of wireless telecom bandwidth and spectrum — has forced the industry to lean heavily on the use of fiberoptic communications networks as much as possible.
We’ve only scratched the surface, though.
This industry undertow is expected to drive revenue growth of 12% this year and next, translating into a profit of $8.36 per share this year (up from last year’s $7.26), and then $9.33 per share in 2019.
Small-Cap Stocks With Huge Potential: Axcelis Technologies, Inc. (ACLS)
Axcelis Technologies Inc (NASDAQ:ACLS) is yet-another technology play that’s ultimately a play on the combination of a brewing economic boom and the budding computer-technology evolution… the great technological leaps we see every few years.
But it’s not quite for the reason you might think. Axcelis doesn’t exactly make the computer chips in your smartphone or laptop or your company’s artificial intelligence hardware. It makes the tools that allow other companies to develop those next-generation computer components.
Its Purion ion-implantation system, for instance, are used in the manufacture of 3D NAND and DRAM sensors, and orders for the Purion were very strong at the beginning of the year.
Whatever the case, valued at a forward-looking P/E of 15.9 and against of backdrop of twelve consecutive (and sizeable) quarterly earnings beats, ACLS is definitely one of the small-cap stocks you’ll want to watch.
Small-Cap Stocks With Huge Potential: Kelly Services, Inc. (KELYA)
Last but not least, you may want to take a closer look at staffing firm Kelly Services, Inc. (NASDAQ:KELYA) sooner than later.
Some things are cyclical, and other things aren’t. The need for workers is cyclical. The new employment model where workers aren’t actually hired on a permanent basis but rather are kept only as long as needed, however, is here to stay; the so-called “gig economy” is a mere microcosm of this trend.
That’s a perfect scenario for Kelly Services, which specializes in providing temporary, flexible staffing.
The kicker: With the economy now humming, there’s a serious shortage of labor in the United States. Organizations are leaning on temporary staffing firms as much as they ever have, and they’re willing to pay these workers — and the outfits that supply them — more generously than they have in the past.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.
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Category: Small-Cap Stocks
