12 Splendid Small-Cap Growth Stocks to Buy
Small-cap growth stocks could be ready to turn the corner after a few years of being outshone by their larger brethren. These 12 picks stand to benefit.
While the novel coronavirus continues to inflict pain in the U.S., investors are looking for companies with greater earnings visibility. That's great news for portfolio managers overseeing small-cap stocks, which have suffered significant underperformance in recent years.
"We are just exiting a seven-year underperformance cycle partially driven by the popularity of mega stocks, particularly the FAANGs (Facebook, Apple, Amazon, Netflix, Google)," U.K.-based Miton U.S. Opportunities Fund portfolio manager Nick Ford recently told CNBC. "And investors have been forced into mega cap stocks because if you are benchmarked against the S&P 500 and you don't own Facebook, Apple, Netflix, etc., you are going to trail the index, and that sucks money out of the small-cap sector."
As the U.S. economy starts to recover, however, small-cap growth stocks will benefit the most. That's because they're largely being valued at or near historical lows.
Once investors come to the realization that small-cap stocks should have superior potential returns over the next two to three years, however, you'll see small-cap stocks' valuations (and, of course, their prices) rise dramatically.
Here, then, are 12 small-cap growth stocks to buy if you're constructing a diversified portfolio and need a little oomph.
Data is as of July 14.
Innovative Industrial Properties
- Market value: $2.0 billion
- YTD total return: 23.6%
- 3-year annualized revenue growth: 418.2% (3-year annualized)
It seems like only yesterday that Innovative Industrial Properties (IIPR, $91.50) bought its first property. However, in reality, the real estate investment trust (REIT) that specializes in owning medical-use cannabis facilities snapped up its first site in December 2016.
The company raised $61.1 million in its initial public offering on Dec. 5, 2016. Two weeks later, the REIT acquired a 127,000-square-foot industrial property in New York state. It purchased the property from PharmaCann LLC, a grower and dispenser of medical cannabis in eight U.S. states. IIPR paid $30 million in a sale-leaseback transaction, which has become the company's calling card ever since.
Today, Innovative Industrial Properties owns 56 properties in 15 states representing 4.1 million rentable square feet of industrial space. The properties are 99.2% leased with a weighted average lease length of 15.9 years.
To date, Innovative Industrial has $883 million in total committed or invested capital generating $84.5 million in annualized revenue. That might not seem like a lot. However, the annualized figure is based on the Q1 2020 revenue of $21.1 million, a figure that's 210% higher than the REIT's revenue in Q1 2019.
It's a big deal.
You won't find many REITs among small-cap growth stocks. But as the cannabis industry continues to mature, Innovative Industrial's seat at the cannabis table is all but assured.
Upwork
- Market value: $1.6 billion
- YTD total return: 30.0%
- 3-year annualized revenue growth: 22.3%
Upwork (UPWK, $13.87) went public on Oct. 3, 2018, at $15 a share. In the 21 months since, the online marketplace that connects freelancers with clients has delivered losses to its IPO investors.
However, despite falling to a 52-week low of $5.14 per share in April, it's beating the S&P 500 handily year-to-date. That's thanks in large part to an 85% run over the past three months.
The company has gone through some rotation in the C-suite. In December, then-CEO Stephane Kasriel stepped down from the top job after leading the company since April 2015, long before it became a public company. Taking over as CEO was Hayden Brown, the company's chief marketing and product officer.
In 2017, the last full year before Upwork went public, it had annual revenue of $202.6 million. Two years later, Upwork reported annual revenue of $300.6 million, 19% higher than in 2018, and 48% higher than in 2017. Analysts continue to expect double-digit revenue growth this year and next.
In June, Jim Cramer, the host of CNBC's Mad Money, suggested that patient investors would eventually be rewarded for their faith in the company that keeps freelancers busy.
Given the work-from-home push, he's probably right.
Glaukos
- Market value: $1.8 billion
- YTD total return: -26.1%
- 3-year annualized revenue growth: 27.5%
When investors think about small-cap growth stocks, chances are good they don't consider many of these companies to have blue-chip financials.
But from time to time, they do.
Glaukos (GKOS, $40.23), a California manufacturer of ophthalmology therapies for the treatment of Glaucoma, recently issued $250 million in 2.75% unsecured convertible senior notes due in 2027. Originally, it had planned to raise $200 million, but due to increased investor interest, the company upped the private offering by 25% to meet demand.
You don't get unsecured debt at rates that low without having a strong balance sheet. With $88.4 million in net cash, Glaukos certainly qualifies.
In November 2019, Glaukos closed on its $500 million all-stock acquisition of Avedro, a Boston-based company whose products provide therapeutic treatment of keratoconus. This condition causes one's cornea to become cone-shaped, thereby causing blurred vision and sensitivity to light.
The buyout was the next step in CEO Thomas Burns' plan to transform the company into a global ophthalmic pharmaceutical and device leader.
In the seven months since the acquisition, Glaukos' share price has fallen by more than a third. That's the result of a slowdown in elective procedures to make way for the treatment of COVID-19 patients. Despite this slowdown, sales in the first quarter managed to improve by 2%, thanks in large part to Avendro's contribution.
Glaukos' revenues have grown from $71.7 million in 2015 to $237.0 million in 2019, a 231% increase in five years. Once elective surgeries resume, investors in this small-cap health care play can be confident the company's sales will accelerate.
Rush Enterprises
- Market value: $1.5 billion
- YTD total return: -7.5%
- 3-year annualized revenue growth: 11.3%
If you need to buy a commercial truck, Rush Enterprises (RUSHA, $43.02) is the place to go.
Founded in 1965 with one commercial truck dealership in Houston, Rush Enterprises now operates more than 200 locations in the U.S. and Canada and generates almost $6 billion in annual sales. In fact, it is the largest network of commercial vehicle dealerships in North America.
Marvin Rush, the company founder, passed away in May 2018. His son, Rusty, is CEO and has been since 2006. The family and estate hold 1.4% of its Class A stock and 42.4% of the Class B stock. Class B stock comes with one vote per share, while Class A shares are entitled to 1/20th of one vote per share.
Since Marvin Rush's death, Rusty Rush has been embroiled in a feud over the estate with his stepmom, Barbara.
Family issues aside, Rush's sales have expanded by 17% over the past five years, from $4.98 billion in 2015 to $5.81 billion in 2019. However, if you zoom in on just the past four years, they've grown by 38%, from $4.21 billion. Operating income, meanwhile, has zoomed 78% over the past five years, to $216.41 million in 2019.
The result has been a five-year total annualized return of 11.6%, which is 34 basis points higher than the entire U.S. market. (A basis point is one one-hundredth of a percentage point.)
Rush Industries isn't as exciting a business as many other small-cap growth stocks, but it looks like a worthwhile long-term investment.
SciPlay
- Market value: $332.2 billion
- YTD total return: 20.0%
- 3-year annualized revenue growth: N/A
If you play free-play digital casino games such as Jackpot Party Casino and Gold Fish Casino Slots, you've used SciPlay's (SCPL, $14.62) products at one time or another.
Scientific Games (SGMS) spun the company off in May 2019. SciPlay sold 22 million shares of its stock at $16 a share to raise $352 million in its IPO. The business was spun off so it could become a pure-play mobile gaming investment focusing on growth opportunities in the social gaming arena.
However, Scientific Games continues to control SciPlay. It holds 82.6% of SCPL's Class A common stock and 100% of its Class B common, giving SciPlay an excellent partner to fall back on should it need a helping hand in the future.
Not that it should.
In the first quarter ended March 31, 2020, SciPlay's cash flow generation improved dramatically, growing by 176% to $23.5 million, from $8.5 million a year earlier. Net income shot 127% higher year-over-year to $31.1 million. Net margins more than doubled to 26.3%.
All of this came on a 4% increase in its mobile revenue, with Jackpot Party Casino and Monopoly Slots delivering particularly strong results.
SciPlay's April revenue set a company record, up 20% over March, thanks to COVID-19. It continues to see healthy single-digit increases in the average monthly revenue per player. In the first quarter, it was $83.58, 9.2% higher than a year earlier.
SciPlay operates in a competitive environment, and its shares have been volatile since its IPO. Nonetheless, SCPL should reward shareholders over the long haul.
Eldorado Gold
- Market value: $1.9 billion
- YTD total return: 39.2%
- 3-year annualized revenue growth: 12.6%
To say Eldorado Gold (EGO, $11.18) is a global mining operation would be an understatement. The Vancouver-based company operates two gold mines in Turkey, two polymetallic mines in Greece, and a gold mine in Quebec, Canada, that opened production in March 2019. It also boasts development projects in Greece and Brazil, with plans to grow its gold production in Canada.
Eldorado tends to look for diamonds in the rough, to use an expression popular among those seeking out small-cap growth stocks.
EGO reported revenues of $204.7 million during the first quarter ended March 31, 90% of which was generated from the sale of 116,219 ounces of gold at an average realized price of $1,580 an ounce. Those sales were 156% better than the year-ago period's revenues. Meanwhile, the bottom line jumped from a $21.1 million loss (13 cents per share) in Q1 2019 to a net profit of $12.5 million (8 cents per share).
Eldorado performed at an exceptional level in virtually every metric. Despite COVID-19, the company has maintained its 2020 annual guidance, which calls for gold production of 520,000-550,000 ounces at an all-in sustaining cost of $900 an ounce at the midpoint of guidance.
If gold stays at or above its current price of more than $1,800 per ounce, investors can expect the remainder of Eldorado's year to be financially rewarding. Yes, shares have already delivered nearly 40% in gains, but EGO stock should maintain its momentum into at least 2021.
Callaway Golf
- Market value: $1.6 billion
- YTD total return: -20.9%
- 3-year annualized revenue growth: 25.0%
As the country does its best to cope with the effects of COVID-19, golf seems to be one of the professional sports that's benefiting from the lone-wolf nature of its game. And even though the PGA Tour postponed this September's Ryder Cup by a year, the tour has been able to resume weekly tournaments with minimal incident – something most other pro sports haven't yet been able to accomplish here in the U.S.
That's very good news for shareholders of Callaway Golf (ELY, $16.76), who've witnessed a bit of a renaissance in its business in recent years. At one point in April 2012, Callaway's stock traded pennies above $5, about one-seventh its all-time high of $38.50, a level last reached in June 1997.
ELY's recovery from those lows has a lot to do with CEO Chip Brewer, who was lured away from Adams Golf to run Callaway in March 2012. He's been in the top role ever since.
"In Chip's tenure at Adams, Adams was able to consistently build market share," golf industry analyst Casey Alexander wrote at the time. "We believe this is the primary task at Callaway as well. We believe this hire should be very well received by the market."
When Brewer was hired, Callaway's annual sales (2011) were $886.5 million, down significantly from $1.1 billion in sales just three years earlier. Fast-forward to 2019, and Callaway's sales were $1.7 billion. More importantly, operating profits between 2015 and 2019 jumped five-fold to $132.7 million.
The company's business hit a bit of a bump in the road in the first quarter due to COVID-19. However, shares have rebounded 59% over the past three months, and long-term, ELY should be fine with Brewer in charge.
Turning Point Brands
- Market value: $555.4 million
- YTD total return: -0.2%
- 3-year annualized revenue growth: 20.6%
Turning Point Brands (TPB, $28.53) might not offer the high-speed growth of a biotech company, but it has managed to do right by shareholders since going public in May 2016 at $10 a share. TPB stock is up 185% in a little more than four years since its IPO.
Turning Point is the maker of alternative tobacco products such as Stoker's moist snuff; Beech-Nut chewing tobacco; Primal non-tobacco smoking products; Red Cap pipe tobacco; a variety of Zig-Zag branded products including cigarette papers, cigar wraps and cigarillos; and Nu-X products that include CBD, caffeine and other consumer products.
The company admittedly took a step back in the first quarter, reporting a 1% year-over-year sales decline to $90.7 million. But the June quarter's results are expected to show significant growth.
The company's original guidance from the end of April for the second quarter was $81 million to $87 million in sales. It now expects to clear $100 million, 8% higher than a year earlier, with strong performances from all three of its operating segments: Smokeless (Stoker's, Beech-Nut), Smoking (Zig-Zag, Primal, Red Cap) and NewGen (Nu-X).
TPB boasts a free cash flow yield of 4.8% based on free cash flow of $33.7 million over the trailing 12 months and an enterprise value of about $697 million. From a valuation standpoint, this small-cap stock is cheaper than it has been since its IPO.
Celsius Holdings
- Market value: $928.4 million
- YTD total return: 177.0%
- 3-year annualized revenue growth: 48.9%
Morningstar classifies Celsius Holdings (CELH, $13.38) as a "speculative growth" stock, which isn't surprising given that it participates in the ultra-competitive world of beverage sales.
Operating under the Celsius brand, the Florida-based company sells healthy carbonated and non-carbonated energy drinks that contain no sugar, aspartame, high-fructose corn syrup, artificial preservatives, etc. Instead, it focuses on healthy ingredients such as ginger, guarana, green tea and essential vitamins.
When Celsius first launched its products in 2009, it marketed its drinks to the weight-loss crowd and found limited traction. It burned through $15 million in IPO money within a year. Current CEO John Fieldly came on board as CFO in 2012, just as it was headed to bankruptcy.
After its setback, Celsius changed its focus from fat-burning to energy and fitness. Fieldly took over as interim CEO in 2017, then took the role on a permanent basis a year later. CELH has been off to the races since then.
CELH's arguably biggest break came in 2018, when 7-Eleven brought Celsius into all of its U.S. convenience stores. It also doesn't hurt to have large investors such as Kimora Lee Simmons (5.7%), ex-wife of record executive Russell Simmons, and Li Ka Shing, one of Hong Kong's wealthiest persons (13.1%).
Celsius's revenues have more than doubled, to $75.2 million, over the past three years. During the first quarter of 2020, sales rocketed 95% higher to $28.2 million; international revenues were up 186%, while U.S. sales climbed 70%. Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) of $2.8 million more than tripled year-over-year.
If you're going to speculate in small-cap growth stocks, CELH offers the kind of growth you want to be a part of.
Noah Holdings
- Market value: $2.0 billion
- YTD total return: -8.1%
- 3-year annualized revenue growth: 10.5%
During the mid-March correction, Shanghai-based asset management firm Noah Holdings (NOAH, $32.49) hit a 52-week low of $20.42. Fortunately, for shareholders, it has since recovered much of its losses … and should be able to climb out of its YTD hole and then some.
Noah Holdings has more than 290,000 high net-worth clients who count on it to provide wealth management both onshore in the Chinese domestic market, but also offshore in places such as Singapore, Melbourne, New York, Vancouver and Silicon Valley.
Asia Money recently named the company the best Chinese wealth manager for handling overseas assets. In 2019, the company's overseas assets under management (AUM) hit $3.5 billion, accounting for 15% of the firm's AUM. More importantly, those assets generated 28% of the company's overall revenues.
Noah Holdings managed to obtain three licenses to practice wealth management in Canada in 2019. It is said to be the first fully licensed wealth management company in Canada with a Chinese parent.
The directors and officers of Noah, which was co-founded by current CEO Jingbo Wang in 2005, own 46% of its shares and control 70% of its votes. Given both its revenues and income has risen dramatically under Wang's leadership, as long as she is CEO, Noah remains a very attractive small-cap growth investment.
Ironwood Pharmaceuticals
- Market value: $1.6 billion
- YTD total return: -23.2%
- 3-year annualized revenue growth: 16.1%
If you've ever known someone who suffers from irritable bowel syndrome with constipation (IBS-C) or chronic idiopathic constipation (CIC), you understand how painful it can be.
That's why Ironwood Pharmaceuticals' (IRWD, $10.22) Linzess oral capsules, the company's first commercial product in its focus on gastrointestinal (GI) treatments, are a godsend for patients suffering from these conditions. Linzess is the No. 1 prescribed, branded IBS-C and CIC treatment in the U.S. The product is intended to calm pain-sensing nerves while accelerating bowel movements, providing fast relief of a very difficult condition.
Although IRWD got its start in 1998, it really got going when Linzess was first approved in August 2012. In April 2019, Ironwood spun off its soluble guanylate cyclase (sGC) business into a publicly-traded company, Cyclerion Therapeutics (CYCN), so it could focus on Linzess and the other GI-related products in its development pipeline.
Heading into 2020, Ironwood had three goals: continue to drive Linzess growth, further advance its GI development portfolio and put the company on stronger financial footing.
First-quarter results, announced in May, showed some progress on all three fronts.
- On the Linzess front, prescription demand for the product increased by 11% YoY, leading to net U.S. sales of $172.2 million, up 6.8%. Ironwood and AbbVie's (ABBV) recent acquisition Allergan collaborate on U.S. sales. Ironwood's take of those revenues was $74.4 million, 12.5% higher than a year earlier.
- As for Ironwood's pipeline, IW-3718, which is intended to treat refractory gastroesophageal reflux disease (GERD), is in Phase III clinical trials. MD-7246, which treats abdomen pain caused by IBS-D (diarrhea), is in Phase II trials. They're coming along.
- Finally, IRWD made a profit of $3.3 million in the first quarter, much improved from the $21.8 million loss a year ago.
This beaten-up small-cap growth stock has been late to the market's recovery party. That shouldn't be the case for long.
Alarm.com
- Market value: $3.3 billion
- YTD total return: 59.8%
- 3-year annualized revenue growth: 24.4%
Alarm.com (ALRM, $68.67) was founded in 2000 to provide residential and commercial customers with cloud-based security solutions that work at all times. That means if the internet is down, the power is out, or the phone line is down, customers still have connectivity.
The firm has experienced significant growth over its 20-year history. In 2009, its growth attracted venture capital firm ABS Capital, which paid $27.7 million for the company. Three years later, it obtained $136 million in funding from Technology Crossover Ventures. In June 2015, Alarm.com went public, selling 7 million shares to investors at $14 a share. Except for 525,000 shares sold by ABS Capital, all of the net proceeds of the offering went to general corporate purposes.
According to the company's IPO prospectus, Alarm.com had revenues of $37.2 million in revenue in 2010 and an operating profit of $6.6 million. In 2019, it recorded sales of $502.4 million with operating income of $50.4 million. If you're counting (and we are), that's compound annual growth of 33.5% and 25.3%, respectively.
ALRM continues to grow the business through a combination of organic sales and strategic acquisitions. In May, it acquired Doorport Inc., which provides rental property owners with a cellular-based intercom system that can be inexpensively retrofitted to an existing setup.
Investors in this small-cap growth stock have done very well. And they should continue to do well given the strong execution of its business plan.
