Small-cap stocks are among the most volatile in the entire market.
They typically have very high betas and are wildly unpredictable, but are favorites among investors because of the upside potential they present.
In this instance, I have identified five small-cap stocks to buy that have a great shot of being at least 100% higher by this time next year.
Mostly, these are under-the-radar stocks, some of which you have likely never heard of, but it is that degree of untapped value that makes each stock so appealing.
Looking ahead, these stocks to buy all have risks, but those risks are outweighed by the upside, and should be strongly considered as additions to every investor’s portfolio.
Small-Cap Stocks That Could Double: Five Below (FIVE)
Five Below (FIVE) has a market capitalization of just $1.75 billion, significantly less than last year following a 21% stock loss in 2015.
With that said, FIVE is by all accounts very small compared to other retailers in the dollar store arena. It has trailing-12-month revenue of just $629 million and less than 440 stores, but with 23% sales growth during its last quarter, it is growing very fast. Further, FIVE is very efficient, with an operating margin over 10%.
What most don’t realize is that FIVE is actually on the same growth trajectory as Dollar Tree (DLTR) back in the early 1990s, growing at a similar year-over-year rate as DLTR when it had similar annual revenues. While FIVE may never grow to be the same powerhouse that DLTR has become, its current trajectory suggests it will grow to become far larger.
With a $1.75 billion market capitalization, and after a year of underperformance, FIVE stock is poised for big gains ahead.
Small-Cap Stocks That Could Double: Yelp (YELP)
Yelp’s (YELP) stock has fallen from $100 to under $30 over the last couple years, now supporting a market capitalization of just $2 billion.
Yet despite these large stock losses, YELP has maintained an aggressive growth rate throughout, on pace for a 45% increase in revenue this year. Furthermore, it trades at a very conservative price-to-sales multiple of just 4, in comparison to other social media companies.
However, the problem surrounding Yelp has not been growth, but rather the legitimacy of its business, and whether mounting lawsuits and SEC complaints would ever cause serious headwinds for the company.
On Nov. 27, a large suit against Yelp was dismissed after the judge found no wrongdoing on behalf of the company, and went on to say that any reasonable YELP investors would realize that user-generated content may not always be firsthand.
This is terrific news for Yelp, as it hints at how other judges may rule in future suits. It also gives Yelp the green light to proceed with business as usual.
Given the degree of stock losses over the last couple years coupled with YELP’s attractive valuation, investors should not be shocked to see YELP soar in the new year, potentially 100%. After all, even if YELP jumped 100%, it would still trade at just 8x sales, which in social media is not all that unreasonable.
Small-Cap Stocks That Could Double: XPO Logistics (XPO)
XPO Logistics (XPO) is not yet a household name in the transport business, but given its growth, it soon will be. The company is on pace for annual revenue of $15 billion after a relentless three years of acquisitions and cold-starts.
To get an idea of how fast XPO has grown, it had revenue of less than $200 million in 2011.
However, revenue growth is no longer the issue for XPO. It is because of that growth that XPO has jumped from $3 in 2009 to more than $25 today, and topped out over $50 earlier this year. Instead, investors want to see profits, and it is because XPO has failed to deliver profits that its stock has had a horrendous year.
Thankfully, all that changes in 2016.
The problem for XPO’s bottom line is that the company has always acquired aggressively, thereby accumulating large integration costs along with one-time event costs. However, XPO management has already said it plans to slow the pace of acquisitions moving forward, in favor of optimizing its two most recent deals, which were also its largest in history.
With XPO on pace for about $1.1 billion dollars of EBITDA over the next 12 months, 2016 will be highly profitable for the company, with positive profit margins and earnings per share. As explained in a series of articles, XPO’s EBITDA translates to operating income at a rate of $0.90 to $1 when there are no unusual costs associated with mergers and acquisitions.
That means XPO should have around $1 billion in operating income next year. Thus, XPO is trading at just 3x next year’s operating income. For a company that’s growing this fast, a 3x multiple is just too cheap. In fact, even a 6x multiple is too cheap, thereby leading me to believe that XPO will in fact double in stock price next year.
Small-Cap Stocks That Could Double: Celldex (CLDX)
Celldex (CLDX) stock is down 13% this year, and has been one of the more volatile stocks of the last five years.
Yet despite this performance, CLDX has been one of the most consistent producers of great clinical data throughout this span, with both of its late-stage cancer drugs successfully treating patient populations who no longer respond to any other treatments.
However, investing in biotechnology is a waiting game — waiting for clinical data, waiting for a new drug application and then waiting for an FDA approval. Thankfully, the wait is almost over for CLDX.
Sometime in the next couple months, CLDX will unveil data from a 745-patient trial on its Phase 3 brain cancer drug Rintega. After proving successful in every large study thus far, and being awarded a Breakthrough Therapy designation by the FDA, not many have concerns over whether the drug works, but rather when the NDA will be submitted for the drug’s FDA approval.
The bottom line is that regardless of when CLDX releases this data, Rintega should be FDA approved sometime next year, and that is a huge catalyst for the $1.56 billion company.
As explained in a previous article, there are catalysts surrounding several of CLDX’s promising candidates. With CLDX trading at just one times peak sales for its two lead candidates, and the biotechnology industry trading north of 8 times sales, CLDX could very well double behind these catalysts and still have room for much larger stock gains long-term.
Small-Cap Stocks That Could Double: Groupon (GRPN)
Groupon (GRPN) has been plagued with inconsistency, disappointment and volatility for essentially all of its time as a publicly traded company. While shares are down 60% this year, GRPN stock has jumped 13% over the last month. That trend higher is something that is very likely to continue well into 2016.
The company is now under new leadership, which is nothing new for GRPN, but already its new CEO has terminated several high-ranking executives and has unveiled a plan to shift product assortment in its growing goods business to drive margins higher.
Nevertheless, the reason that GRPN is finally a buy doesn’t have much to do with new leadership or its growth prospects in 2016. Fact is, the bar is set extremely low for GRPN to succeed, with Wall Street expecting very little if any growth and investors already skeptical of the company’s new leadership. Therefore, any surprises will be positive for GRPN stock.
Furthermore, GRPN is very cheap. With nearly $230 million in free cash flow, GRPN stock trades at just four times FCF minus cash.
While the company most certainly has its fair share of problems, the fact that it is so cheap coupled with low expectations make it especially likely to have a breakout year in 2016.
As of this writing, Brian Nichols owned shares of XPO, CLDX and FIVE.