Small-cap stocks may have been laggards over the past 12 months, but that could be about to change.
With the economic undertow getting sluggish and a strong U.S. dollar now creating a headwind for large companies that rely on overseas sales, nimble small caps are quickly becoming the better sliver of stocks to buy for investors seeking market-beating returns.
To that end, traders on the hunt for new small-cap stocks to buy may want to start their search with a closer look at these five names, chosen based on a combination of growth prospects and reliability.
In no particular order, her are five of the best small-cap stocks to buy.
Small Cap Stocks to Buy — Ebix Inc (NASDAQ:EBIX)
With just a quick glance, it would be easy to conclude software maker Ebix Inc (NASDAQ:EBIX) has a little too much baggage and has waved a few too many red flags in its past to risk taking on a position now.
Namely, the company has had run-ins with the IRS, the SEC, and U.S. attorneys looking for evidence of money laundering. Though none of those probes really went anywhere too damning for Ebix, investors tend to steer clear of small-cap stocks that have a penchant for trouble … even if the business model is a sound one, as is the case the Ebix’s.
There was a subtle yet important shift on this front a few months ago, however. Atavist investment group Barrington Capital injected two more directors into the Ebix board, which will effectively open the umbrella of oversight and accountability over the company’s management.
In all fairness, Ebix was on that path anyway. The presence of Barrington’s people, however, should hasten the trip down that turnaround path.
Small Cap Stocks to Buy — JAKKS Pacific, Inc. (NASDAQ:JAKK)
With shares of JAKKS Pacific, Inc. (NASDAQ:JAKK) down 70% since its 2011 highs and arguably still in a downtrend, JAKK may be a surprising addition to a list of small-cap stocks to buy. At a price of only $6.28 though, the value is certainly there.
Perhaps more importantly, a compelling future — the missing ingredient for far too long –– is finally coming into view.
As of the latest look, JAKK is valued at 11.6 times its trailing earnings and 7.9 times its forward-looking (2016) earnings. The earnings outlook likely underestimates the company’s true growth potential, though, as JAKKS Pacific beat earnings estimates in three of last year’s four quarters. Revenue growth of 28% last year was also solid, and 7.8% stronger than initially anticipated.
As of the most recent numbers, analysts say JAKKS Pacific is going to post weaker revenue this year. That’s the hidden value with JAKK though — it’s unlikely the company is going to move backwards on the revenue front now that it’s found a winning formula. The addition of Warcraft and Smurf toy lines is only going to up the odds of solid revenue growth.
Small Cap Stocks to Buy — ClearOne Incorporated (NASDAQ:CLRO)
With a market cap of only $99 million, ClearOne Incorporated (NASDAQ:CLRO) is the smallest of the five small-cap stocks under the microscope here. So tread lightly — stocks of this size can and do turn quickly without warning. All the same, CLRO is an interesting story.
The company makes a variety of high-tech and high-end wireless communication equipment, including microphones, video cameras, and IP video decoder boxes. Its most recent unveiling was the VIEW Pro decoder, which offers a network streaming solution at an affordable price.
It’s the kind of technology consumers and business notice when they don’t have it, but take for granted when they do have it. More importantly, it’s clearly a marketable product line even if a little mundane. Sales are expected to expand another 13% this year after climbing an impressive 17% in 2014.
Earnings are expected to grow even faster as the company scales up its operation in the wake of increasing usage of network connectivity.
The catch: ClearOne reported encouraging Q4 results on Thursday morning, and CLRO shares jumped 6% on the news. While the results confirm the pick’s merits, it may be worth waiting for a lull or dip to wade into a new position.
Small Cap Stocks to Buy — KapStone Paper and Packaging Corp (NYSE:KS)
There’s no getting around the fact that investing in paper and packaging company KapStone Paper and Packaging Corp. (NYSE:KS) is boring, especially in the realm of small-cap stocks that offer much more riveting prospects.
There’s nothing wrong with a little value rather than growth for your small-cap stocks, though, and KS offers plenty of reliable value. Earnings have grown for three straight year, revenues have grown for five, and both are projected to keep growing at least through 2018. It’s that kind of consistent success, along with a forward-looking P/E of 13, that makes boring ol’ KS worth holding.
That being said, there may be more of a growth element at hand for the paper and packaging industry than most fans of small-cap stocks fully appreciate.
Though it was in reference to the February earnings report from Packaging Corp. of America (NYSE:PKG), Vertical Research Partners analyst Chip Dillon recently noted:
“The only thing that has changed (regarding PCA and the U.S. industry) is that the market is seeing an increasing chance that U.S. containerboard and box prices will rise this year, possibly in the first half. It has been two years since there was an increase and labor and wood costs have risen. U.S. box demand is strengthening while capacity growth remains muted, thus creating tightening conditions that could be conducive for a price increase.”
If it’s good for Packaging Corp. of America, it’s apt to be good for company KapStone Paper and Packaging, too.
Small Cap Stocks to Buy — SciClone Pharmaceuticals, Inc. (NASDAQ:SCLN)
SciClone Pharmaceuticals, Inc. (NASDAQ:SCLN) is unique in that it’s one of the few small-cap stocks in the drug/biotech space that’s bearing reliable revenue, and is doing so profitably. And, it’s likely going to be doing even more business this year; the company in January it was projecting an approximate 17% increase between 2014’s and 2015’s top line.
The company’s primary product is a drug called Zadaxin, which has been approved for multiple indications in several countries. It’s also a licensee of several other drugs that, while not necessarily show-stopping, could prove to be surprisingly marketable.
The fourth-quarter earnings report from SciClone Pharmaceuticals posted Wednesday afternoon only underscores the company’s potential for upside surprises. The operating profit of 29 cents per share topped estimates of only 15 cents, and trounced the profit of seven cents per share in the same quarter a year earlier. Sales were up 26% in Q4. Full-year figures grew comparably.
As was the case with ClearOne though, the knee-jerk jump in the stock’s price may mean newcomers should hold off on any entries until things have settled down.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
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