Stock markets have posted a strong start to 2019, and the S&P Small-Cap 600 Index is already showing YTD gains of 9.3%. Ironically, this is the strongest yearly start for the small-cap space since 1987. Unfortunately, this trading period is remembered mostly for the Black Friday market crash (which occurred on October 19th and resulted in single-session losses of 22.61% for the Dow Jones Industrial Average).
If history even comes close to repeating itself, investors could benefit substantially from short-selling opportunities which have developed as a result of these recent rallies. Here, we will look at two small-cap stocks which could be at risk of bearish selling pressure in the weeks and months ahead.
Contrarian Play: Crocs, Inc. (NASDAQ: CROX)
One of the most interesting stories in the small-cap space over the last year has been the massive valuation rally which has been generated by Crocs, Inc. (NASDAQ:CROX). Founded in 1999, Crocs manufactures casual footwear and distributes its products in roughly 90 countries worldwide. The Colorado-based company has defied the odds and avoided the Amazon-inspired losses which have been shouldered by many organizations vulnerable to the changing trends in retail.
Over the last 52-week period, CROX has gained nearly 110% in moves that have been aided by positive earnings surprises. The company has beaten analyst expectations for earnings in each of the last three quarters. The most recent reporting period was characterized by an upside EPS surprise of 450% and this helps explain the market exuberance which sent share prices above the $30 level.
Current levels of optimism appear to be unjustified, however, and the latest rally has driven the stock’s P/E ratio (TTM) to 119.92. Moreover, negative trends in revenue growth have increased in magnitude since 2014. Given the stock’s elevated valuation, this scenario places long investors in a precarious position as the stock is vulnerable to sizable moves lower if rising volatility levels persist this year. Bearish traders interested in medium-term opportunities might consider buying a put option contract on the stock with a $24 strike price and 6/21/2019 expiry for $1.70 (yielding a breakeven price of $22.30 per share).
Momentum Play: Rand Capital Corp. (NASDAQ: RAND)
On the other side of the trend spectrum, we have Rand Capital Corporation (NASDAQ: RAND) which has displayed strong downside momentum in its share valuation for nearly three years. Rand Capital is a closed-end management investment company which deals primarily with the securities of small businesses, and positive investor news in recent sessions has sent share prices back toward the $3 level.
A quick look at the long-term charts, however, will show a highly erratic price history with brief spikes higher in 1995 and 2000. This activity is matched by the company’s profitability performances, as revenues have been in decline since 2015 and EPS has fallen into negative territory for the last two years. The severity of RAND’s long-term decline places any rallies in question, and the recent spike into $3 puts investors back into a support-turned-resistance region which can be used to short-sell the stock. Stop losses on the trade should be placed above the recent spike high at $3.60 per share, and profit targets on the position can be set above the stock’s long-term support levels at $1.30.
Disclaimer: The author and Spotlight Growth has no positions in any of the stocks mentioned in this article. Nor does either party currently have any relationship, or any other conflicts of interest, with any of the companies mentioned in this article. This content is meant for informational and entertainment purposes only and should not be meant as a recommendation to buy or sell any securities. Please visit a licensed financial representative to determine what investments are right for you.
Article By: Richard Cox