Investors looking for the next “big thing” in investing are likely to find what they want by seeking out small cap stocks. Small caps are a somewhat flexible term, but any company with a market capitalization under $1 billion is definitely one.
In today’s world, with some companies having trillion-dollar-plus valuations, even $10 billion could be considered small, although after that, you start to get into the mid cap category. Some are growth stocks with a high earnings yield, others are value stocks as determined by fundamental analysis. And not all small caps are penny stocks, as many small companies have a high share price.
However it’s defined, a small cap stock isn’t an automatic winner. To become a big company, a small cap must execute well and create a new product or service that’s capable of growing at a rapid rate for a sustained period of time. And many lack Wall Street coverage, so you can find some diamonds in the rough before institutional investors dive in.
The world has a number of such companies, many of which look like attractive investment plays today.
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Best Small Cap Stock #1: Unisys Corporation (UIS)
This information technology (IT) company offers cloud and infrastructure services, including app services. It also provides technologies such as software for enterprise computing. In short, the company serves as a remote IT department.
The space is a solid one to be in, and service offerings can produce solid profit margins along the way, as well as recurring revenue. That’s the kind of business that makes sense for the long term, and can grow and scale along the way. It’s no surprise that the company reported a 35 percent profit margin the last year, even as revenues slid by 7 percent.
As part of the rising remote trend this year, there’s an opportunity for the company to get back onto a growth path and start increasing its revenues and profit margins even further.
While this company may lack the brand recognition of larger companies, there’s plenty of room for smaller companies like Unisys to meet the needs of smaller businesses at a more personal level than a larger company in the IT space. This is an interesting tech-themed play in a small-cap package.
Best Small Cap Stock #2: Alpha Pro Tech (APT)
When Covid-19 started getting serious, investors started looking for companies that made high-quality masks capable of high filtration. While many gravitated towards 3M (MMM), that’s only a small proportion of their business.
For small-cap play Alpha Pro Tech (APT), however, masks are their entire business. The company has seen its revenue surge by tens of millions of dollars, at time when its revenues had only just hit a few million. That led to an explosion in shares higher, and the long-term trend is likely for higher prices still.
While its share price got a little heated during the worst of the market selloff, shares have since cooled down a bit, down about half from their all-time intraday high.
As the virus seems likely to continue for some time, the company’s recent surge of orders only looks like the first wave of substantially higher revenues over time.
Best Small Cap Stock #3: Jumia (JMIA)
Missed out on Amazon? Jumia operates as an e-commerce platform in Africa. That includes a online marketplace, bringing together buyers and sellers online, as well as logistics and payment options to ensure goods are transferred and the money changes hands. Besides the traditional sale of goods, Jumia’s platform offers services such as flight booking and restaurant food delivery.
Services offer far higher margin than acting as a middleman for the sale of mere goods. So it’s a play on both Amazon and on other companies like Delivery Dudes and Priceline, with a little bit of PayPal mixed in. Africa has a huge potential e-commerce market. The demographics of the continent are young and fast-growing.
For investors who missed the rise of Amazon or China’s Alibaba, this is a chance to get in on a huge potential market on a proven tech play. Just beware, like Amazon most quarters, the company doesn’t yet turn a profit. For Amazon, that isn’t a problem right now. It’s still a problem for other names in the space like Jumia.
But this is a reasonable long-term play on the continued rapid economic growth in an often-under-invested continent. And while the company operates in Africa, it’s headquartered in Germany. And with a low price and insiders owning about 38 percent of the company, their interests are aligned with long-term buyers today.
This is an inexpensive stock that could provide the same returns investing in Amazon in the 1990s for patient investors willing to look beyond a short-term price target.
Best Small Cap Stock #4: Viking Therapeutics (VKTX)
A smaller player in the biotechnology space, Viking Therapeutics is working on the development of therapies for metabolic and endocrine disorders. As an early stage player, the company is yet to be profitable, losing about $30 million in the past year.
While the company is too small and lacks the steady cash flow and revenues to support a dividend yield, corporate insiders own 11 percent of shares, a reasonably high percentage to ensure that their interests are aligned with other investors over the long haul.
However, the company has almost no debt and nearly $270 million in cash, which is over half the company’s market capitalization.
That’s a small cap biotech play that value investors may want to examine more closely, as the stock price is likely undervalued. That’s especially true as most capital in the space has been flowing towards companies working on Covid-19 vaccines and other products. In time, the spending in the sector is more likely to balance out, and Viking has the balance sheet strength to see that through.
Best Small Cap Stock #5: FuelCell Energy (FCEL)
FuelCell Energy (FCEL) has a market cap of over $550 million, but there’s a lot of potential for this company to hit a billion-dollar valuation and head higher from there in the years ahead.
Why? The company is a manufacturer and seller of stationary fuel cell power plants.
Fuel cells allow for distributed power generation, utility grid support, and on-site power for places that need it. The company’s products serve utilities, industrial locations, as well as educational, healthcare, and data center facilities.
Given the difficulty of improving the existing power grid, the company provides a great solution to customers with its small-scale solutions.
While shares are considerably down over the past five years, the past year has seen a massive upswing in shares as the company has reported improving earnings. The share price has risen from a low of $0.13 to over $2.36, nearly a ten-fold gain. That’s the kind of massive returns possible with smaller stocks, and with FuelCell’s revenue growth up over 104 percent in the past year, it’s likely to continue climbing higher.