After free-falling in March, the stock market enjoyed a nice bounce in April. After falling as much as 35%, stocks are now down just 20% from the Feb 12th high. Are there any hot small-cap stocks worth looking at right now? Yes indeed.
When the stock market crashes, nearly all stocks crash with it. For example, of the 30 component stocks in the Dow Jones Industrial Average, only two are higher now than their about 3 months ago (Walmart, Inc. (NYSE: WMT) and Johnson & Johnson (NYSE: JNJ)). While lower prices may be appropriate for most companies given the situation, some companies will continue to grow in spite of – and sometimes because of – the coronavirus. A few stocks are now incredible bargains, diamonds in the rough.
The First Sign of a Great Small-Cap Stock
When a crash blows up the market, the first impulse investors often have is, “just sell everything.” But investors tend to hold onto their best stocks. They know that if these stocks go down, they could come back with a vengeance. Not many companies increase sales during a recession. But if anyone has a chance of doing that, fast-growing small-cap companies can.
3 Small-Cap Stocks
These three small-cap stocks are in that category. All three growth stocks do not appear to be slowing down much, pandemic or no pandemic, at least so far. In addition, they don’t seem to have hit the radar yet of professional investors on Wall Street because they are too small (an advantage the little guy has over a professional investor). All these stocks fell in March, but they look great and they are climbing again.
Fast-growing Amarin Corporation (NASDAQ: AMRN) developed a fish-oil drug, Vascepa, that lowers the risk of heart attack, stroke, and other life-threatening events. The drug was one-of-a-kind with a huge global market estimated at tens of billions of dollars. Then, on March 30, Amarin lost a patent lawsuit that everyone thought they would win. The lawsuit opened the way for rivals to develop generic medications. The small-cap stock cratered the following day, losing 70% ($13.58 to $4).
While this is truly bad news for the company and its stock, the ruling is not as bad as it sounds at first cringe. First, Amarin has a huge head start on its rivals, who need 18-24 months to develop their own generic drugs. Second, the FDA has approved Amarin’s drug for two applications; the lawsuit only affects one of them; the other FDA-approved use remains intact. Third, the ruling only affects the United States – it has no effect on the global market where Amarin is already in hot pursuit, now making regulatory headway in Canada, Europe, and Asia. And, of course, they still might win a reversal on appeal.
Investors appear to be digesting all of this. Since the initial sell-off that took AMRN down to $4, the stock has since climbed to $7.53 (as of April 24), nearly doubling in three weeks. Could the pandemic slow down sales of Vascepa? Certainly, but most people will spend their last dime on a drug that can save their lives. Ruling or no ruling, sales have yet to show any hint of slowing down.
In recent years, many states have passed legislation allowing for the medical and/or recreational use of marijuana, creating a new industry. Dozens of companies quickly jumped in with dreams of quick profits…and nearly all of them are drowning in debt and not remotely close to being profitable.
Trulieve Cannabis Corporation (OTCQX: TCNNF) (CSE: TRUL) is the rare exception. The company is growing fast, and they are already profitable. The company has only been in existence for two years, but over that time they have grown sales to over $252 million in fiscal 2019, more than double 2018 sales of $102 million. Profits in 2019 was $178 million, four-fold higher than 2018 profits of just $42 million.
What amazes me is that you can buy the stock right now with a P/E multiple of just 6. When the company grows, the growth multiple (between 20-50) will apply and the stock will go through the roof. Now priced at $9.60, this stock will hit $30 within 3 years if sales continue at the current pace. At least Cantor Fitzgerald’s analyst, Pablo Zuanic, thinks so. He recently set a price target of $32 for the stock.
For a turnaround play on oil, look at Matador Resources Company (NYSE: MTDR). Based in Texas, Matador searches for and produces crude oil and natural gas. Like everyone else, Matador stock fell off a cliff with the recent rout in oil prices, down 75% year-to-date. However, the stock is up almost four-fold since the low on March 18.
While demand for oil will remain low as the world remains in lockdown, the oil industry will compensate. In time, the oil industry reacts to shocks in demand. Less oil will be produced, weaker companies will go bankrupt or be acquired. Prices will eventually settle to a point where profits will go to companies that supply what the market needs.
For these reasons, the shock in oil prices has probably hit bottom and, in my view, will slowly recover from this point. Matador will follow this trend. Sales have increased steadily from quarter to quarter. And while profits have been erratic due to the volatile price of oil, they have consistently made a profit every quarter. And the price is right at $4.41 with a P/E ratio of 6. Long-term outlook remains positive but short-term prices will likely remain volatile.
All three companies are small, growing fast, and very volatile. So, unless you’re an adrenaline junkie, don’t bet the farm on any of these small-cap stocks. Still, they might make an excellent part of the riskier section of your portfolio.
Disclosure: The author, Gregg Killpack, is long TCNNF and AMRN. However, Matt Rego or Spotlight Growth do not have any position or relationship with any companies mentioned in this article. This article should not be taken as a solicitation or recommendation to buy or sell any securities. Please conduct your own research and consult your financial advisor to determine your risk tolerance and investment path. We are not licensed brokers or investment advisors.
Article By: Gregg Killpack