Investing in small-cap companies — defined as any business with an arbitrary market capitalization of under $2 billion — can be a high-risk but high-reward endeavor. Many investors dream of getting in on the next Amazon.com way ahead of the curve and reaping huge rewards.
But the fact is that just buying one or two small businesses likely won’t cut it. For every story like Amazon, there are dozens of small caps that never grow at all; some close up shop altogether. To increase the odds of picking a big winner, a basket of small-cap stocks is the better route to go.
With that in mind, here are five small caps (or close to it, per the traditional definition) that I think are worth a look right now…
The other real estate disruptor
When it comes to online real estate services, most investors think of Zillow Group or the still-privately-held Trulia. A smaller name in the game is Redfin, which boasts having the most visited real estate brokerage website in the U.S. The company provides its agents with technology to keep brokerage fees to a minimum — usually a 1% to 1.5% listing fee for home sellers. Undercutting other real estate brokerage outfits has been a winning strategy. During the second quarter of 2019, Redfin commanded a 0.94% share of the existing home sales market, up from 0.83% a year ago.
It’s a nice rate of growth at the expense of competitors that obviously leaves plenty of room for more expansion, but it’s the other services in addition to brokerage that are really garnering attention here. Redfin has recently added mortgage and title services, direct cash offers (where Redfin makes an offer to buy a home), renovation, and other services, rounding out its capabilities as a type of one-stop shop.
Sales from these new lines of business grew to $61.3 million during the first half of the year, up from only $12 million in 2018. As they continue to grow, they should help Redfin reverse its operating loss and put the company into the black. In fact, total third-quarter revenue is expected to surge at least 59% year over year, pushing Redfin back into profitable territory. Longer-term, though, this small real estate disruptor has plenty more room to grow from its current valuation of just $1.6 billion.
The better bet on the developing world
Emerging market stocks — companies that operate in countries like China, India, Brazil, etc. — lure in many investors (myself included) with the promise of spectacular growth tied to their participation in fast-growing economies and hopes of big investment returns. The thesis sounds good, but it hasn’t exactly panned out in the last decade; emerging market stocks are flat, on average, over the last 10 years, as measured by the iShares MSCI Emerging Markets ETF (NYSEMKT:EEM).
But there are other ways to play the development of emerging economies and other economic success. NV5 Global is one of them. This engineering and consulting company is valued at just $803 million, but has been steadily growing for years via both organic growth and acquisition. The company has made six purchases of smaller outfits this year alone, and revenue and net income are up 23% and 20%, respectively, during the first half of 2019. Total backlog of work increased 43% year over year to $451 million, indicating there’s plenty of growth left in the immediate future.
Boasting services that span energy to city infrastructure to industrial design, NV5 has ample exposure to the North American market, with offices in Asia as well. Engineers aren’t going anywhere anytime soon, and NV5’s breadth of experience across multiple design disciplines means it could be in the running to help develop the emerging world for years to come.
China’s other e-commerce puzzle piece
Speaking of emerging market stocks, here’s one that bucks the trend: Chinese e-commerce and related logistics tech provider Baozun. The stock is flat over the last year, getting knocked around as everything else related to China has been of late, but over the last five years, shares have quadrupled. That makes Baozun a standout in the emerging market space.
And it’s still tiny, clocking in at just $2.8 billion in current market cap. While most Americans have heard of Chinese heavyweight Alibaba (NYSE:BABA), Baozun goes mostly unrecognized because of its focus on helping merchants get up and running online, rather than being a retailer itself. The various services Baozun offers integrate into Alibaba’s huge platform, tying the small company’s fate to China’s leader — which is still growing fast — in digital selling.
The volatility in the last year could mean there’s a good buying opportunity. China’s economy is slowing, and the U.S.-China trade war is creating some extra storm clouds, but e-commerce is still going at a torrid pace. To wit, Baozun’s sales grew 47% in the second quarter, and the full-year outlook is for gross merchandise value (GMV, the total value of items sold through its platform) to increase 40% to 50%. At that rate — or anything close to it — Baozun will be much larger than it is today in a decade’s time…
Continue reading at THE MOTLEY FOOL