Depending on who you ask, the market is currently on a 10-year bull run or a 1-year bull run. Either way, if you’re confident it will continue its upward momentum, the best way to capitalize is by buying small-cap stocks.
Lately, investors have been hesitant to trust small-caps, preferring instead to ride the waves created by large-cap companies. In fact, a disproportionate number of investors rely on only five picks, the so-called FAANG stocks (Facebook, Amazon, Apple, Netflix, and Google).
Mike O’Rourke, Chief Market Strategist at JonesTrading, recently diagnosed the problem:
“It is clear that the market’s idea of investing in 2020 is for all dollars to flow into the same five names. S&P 500 companies added $257 Billion in market capitalization [Thursday]. Apple, Amazon, Microsoft, Google and Facebook’s gains accounted for 43%, or $110 billion, of the market cap growth.”
Small-Cap Stocks Provide Big Potential
But that hasn’t stopped some analysts like Steven DeSanctis, a small- and mid-cap equity strategist at Jefferies, to predict that small-cap stocks will outperform large-caps in 2020. Specifically, he forecasts that the benchmark small-cap index—the Russell 2000—will rise 7% to 1,750 by the end of the year.
If that growth materializes, it’d be 2% higher than the firm’s current prediction for the S&P 500.
The fact is, investors who only trust mega-corporations miss out on the red-hot opportunities that can only be found among small-cap stocks. Small-caps tend to focus on more specific areas in a given sector, meaning investing in them is riskier, but they can provide greater returns.
Small-cap valuations are also currently at their most attractive levels relative to large-caps since 2003. This means that, if you’re willing to gamble on small-cap stocks, now’s the time to roll the dice.
Which Small-Caps are Primed for Growth?
Right now, some small-caps are going head-to-head with the FAANG stocks over niche business areas.
By punching way above their weight, these stocks have an opportunity to slay the giants and earn a fortune doing so. Even if they show only moderate success at improving upon a mega-corporation’s business model, they can still become a valuable takeover target for that corporation or one of its rivals.
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Either way, if you see a small company competing admirably in an area controlled by a FAANG stock, you best keep an eye on it. Let’s take a look at two small-cap stocks that are currently doing just that.
Small-Cap Stocks: Smartsheet
Smartsheet Inc. (NYSE:SMAR) is a Washington-based company that develops and markets the Smartsheet application.
Smartsheet can take disorganized data from emails, phone calls, face-to-face meetings, and spreadsheets, and accumulate it all in one place. Not only does this help people store and organize information, but it also allows them to analyze otherwise incomprehensible data.
The company is competing with Microsoft (NASDAQ:MSFT)—specifically its Excel spreadsheets—and finding success with small businesses. After soaring 80% in 2019, SMAR shares are currently trading at $46.09.
According to its Q3 earnings release, Smartsheet’s revenue jumped 53% year-over-year to $71.5 million. On top of that, subscription revenue came to $64.4 million, an increase of 55%.
In addition, the company’s dollar-based net retention rate of 134% shows that customers are finding value in Smartsheet’s products. This metric means existing customers spent an average of 34% more on the company’s products in the quarter than they did in the year-ago period.
Small-Cap Stocks: Vonage
The New Jersey-based Vonage Holdings Corp. (NYSE:VG) is a cloud-based communications service provider.
Vonage has been on a tear lately, acquiring a number of small but promising companies like Vocalocity, Telesphere, iCore Networks, SimpleSignal, TokBox, NewVoiceMedia, Over.ai, and Nexmo. In particular, Nexmo—a platform that processes text and voice messages for apps—is its core growth engine.
With Nexmo, Vonage is competing against Amazon’s (NASDAQ:AMZN) SNS (Simple Notification Service). Fortunately, the company’s revenue growth is accelerating, driven mostly by the strength of its API business, specifically Nexmo. This segment posted 46% annual revenue growth last quarter.
According to the Motley Fool, Wall Street analysts expect Vonage’s revenue to rise 13% by the end of fiscal 2020 and 9% in fiscal 2021. Its earnings are expected to tumble 44% this year, due to recent acquisitions, but rebound 6% next year.
So if you’re looking for a new company to add to your portfolio, don’t be afraid to take a risk on a small-cap stock. Check out this list for five more small-caps to keep on your radar.
Featured image: DepositPhotos © konstantynov
