With the new year comes a new decade, and investors are eagerly on the lookout for stocks that could set their portfolio alight in 2020. Going off the beaten track slightly, small-cap stocks could be a source of some of the biggest gainers as we enter the third decade of the new millennium.
Why? Because small-cap stocks are considered the best measure of the well-being of the domestic market due to the fact that this is where they generally tend to generate the majority of their revenue and so are less volatile to global economic turmoil—of which we might see a lot of in the coming months. The Fed slashed interest rates not once, but three times, in 2019, in an effort to stimulate economic activity, which should boost domestically inclined companies.
So that’s our reasoning as to why small-cap stocks look set for a big year, now let’s take a look at three which have really caught our eye early on this year.
Rite Aid Corporation (NYSE:RAD)
The last few years haven’t been overly kind to Rite Aid and its investors. A failed merger with Walgreens (NASDAQ:WBA) in 2015 was thwarted by the Federal Trade Commission as it would have left US consumers with a choice of just two major pharmacy chains. This forced Walgreens to instead purchase 2,186 Rite Aid stores for over $5 billion USD, essentially halving the company. Then a second merger, this time with Albertsons, failed in January 2018 due to investor resistance, leading to a 90% loss in RAD stock in the last 24 months as it crashed from $174.20 to just $14.50.
However, all of that is now in the past, and having ousted John Standley, the CEO who oversaw both failed mergers during his nine-year tenure, Rite Aid looks back on track as it heads into a new decade under the leadership of Heyward Donigan. The company enjoyed quite a happy holiday period, which saw RAD stock nearly triple in nine days of trading after surprising investors with better than expected quarterly earnings.
Rite Aid’s adjusted profit was nearly eight times higher than analysts’ expectations, boosted in particular by strong pharmacy sales. The 42% intraday gains on December 19, the day those earnings were reported, contributed to the best month for RAD stock since April 2009.
Smartsheet Inc (NYSE:SMAR)
With the imminent arrival of 5G technology, combined with surging popularity in AI and VR technologies, the twenties look set to be a decade defined by unprecedented technological advancement. Given the changes that we’ve seen in technology since the nineties, it is a true testament to the foresight of Microsoft (NASDAQ:MSFT) that we are still using Excel in much the same fashion we were 20 years ago. However, disruption is a concept we will become all too familiar with in the coming years, and Smartsheet could just be Excel’s greatest disruptor.
What differentiates Smartsheet from its competitors, namely Excel and Google Sheets, is that it has the ability to take unstructured data from emails, phone calls, meetings, and spreadsheets and accumulate it all under one umbrella. This allows employees to organize and analyze data in ways that Excel is incapable of.
From an investment standpoint, SMAR stock looks like a sturdy investment because its business model operates by way of a networking effect. Basically, a small division of a company, or even a single employee, uses Smartsheet and is impressed with it. Once they see how it operates, management adopts the platform company-wide and thus generating much more subscription revenue. With over 5.8 million users contributing to a 53% increase in revenue in 2019, and a 135% increase in SMAR stock since its 2018 IPO, 2020 looks like it could be a big year for this small-cap stock.
Innovative Industrial Properties Inc (NYSE:IIPR)
The massive disappointment that was the legalization of cannabis in Canada was one of the stock market’s biggest talking points in 2019. Many had banked heavily on a so-called “green rush,” but a combination of supply issues, scandals, a lack of retail visibility, and regulatory uncertainty meant that the nascent market just never really got going, leading pot stocks to tank across the board.
The failure of the market to live up to the hype has led to a huge cash flow problem for many companies. Most firms invested heavily in massive cultivation and production sites but are now lacking in the necessary revenue to sustain these projects. This is where IIPR comes in. As cannabis firms struggle for financing, burdened by the substantial costs in building these facilities, IIPR offers them the chance to sell the facilities on a sale-leaseback agreement, making it one big landlord to the cannabis industry.
IIPR ticks all the boxes an investor should want to see ticked: it’s profitable, pays a dividend, and gained over 70% in 2019 alone. While the launch of the cannabis 2.0 market should sure up declining pot stocks, IIPR is set up for long-term sustainability given the length of its agreements (usually about 20–25 years) and the fact that the pot market is only set to expand in the coming months and years.
The 2010s were a phenomenal decade for investors and the stock market as a whole. August saw the bull market break longevity records for the longest upward trend ever, and the descent of the Times Square Ball on New Years Ever meant we officially spent the entire decade in a bull run. With technological disruption set to define the next ten years, it’s almost impossible to predict where the markets are going to go. However, the three stocks mentioned above certainly made a case for themselves over the last few years and bear all the hallmarks of success in 2020.
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