Small- and mid-cap stocks are known for their high risk, sure. But they’re also known as being excellent stocks to buy for their highflying potential, too.
That’s because these smaller companies tend to be undercovered, and without that attention, they often tend to be undervalued for long periods of time. As a result, if you’re looking for the best stocks to buy to outperform the market … well, it pays to go small.
Right now, the major U.S. blue-chip indices are trading at all-time highs. Yet the Russell 2000 small-cap index is 5% off its all-time highs. This further suggests that small- and mid-cap stocks are a value right now.
Today, we’re going to look at 10 such stocks that are either underloved right now, or are just flying under the radar as they usually do. Consider these some of the best stocks to buy to outperform the market over the next few months.
Best Small- and Mid-Cap Stocks to Buy Now: Zagg (ZAGG)
Market Cap: $203 million
This is a company whose revenue jumped 50% during its last quarter, and its gross margin expanded by 200 basis points. While M&A played a big role in Zagg’s growth, what’s more important is that Zagg controls more than half of the screen-protection market.
With telecom companies offering annual upgrades on smartphones, and trade-in values for used smartphones climbing, there is now tremendous value in the company’s most important product. Furthermore, Zagg has a growing share of other key markets like headphones and battery cases.
Given Zagg’s market share with these products, investors should expect no more than 10% organic growth long-term. However, at just 9 timesforward earnings, ZAGG stock still is very cheap for a company with 10% organic growth.
Best Small- and Mid-Cap Stocks to Buy Now: Fitbit (FIT)
Market Cap: $3 billion
Fitbit Inc (NYSE:FIT) carries a $3.2 billion market capitalization, though that’s after losing more than 50% of its value over the last year. Ironically, Fitbit earnings have been among the strongest in all of technology, consistently beating expectations and raising guidance in each quarter since going public.
The problem is, Fitbit has beaten analysts’ expectations … just not the overly exuberant expectations of everyone else.
Thanks to its share losses, FIT now trades at just 10 times forward earnings. That is incredibly cheap for a company that’s expected to grow 39% this year and 16% in 2017.
With product refreshes ahead, and new smart wearables along with the potential for additional services and home products, FIT stock look poised to outperform the market.
Best Small- and Mid-Cap Stocks to Buy Now: Sodastream (SODA)
Market Cap: $600 million
Sodastream International Ltd (NASDAQ:SODA) has nearly doubled over the last year in one of the quietest big moves on the market.
Maybe that’s because shares still are down a whopping 60% from their all-time highs.
Sodastream is a company that will never grow to take on the big boys of soda, but after two years of margin and revenue losses, expectations are finally low enough for SODA to beat. While the company’s earnings don’t match its performance in 2013, or even 2014, they are growing relative to last year.
Given its large losses over the last few years, expect Sodastream’s 10% and 6% revenue growth over the next two years to drive SODA higher, and allow it to outperform the broader market.
Best Small- and Mid-Cap Stocks to Buy Now: Acadia Pharmaceuticals (ACAD)
Market Cap: $4.1 billion
Acadia Pharmaceuticals Inc. (NASDAQ:ACAD) stock is trading right in the middle of its 52-week range, despite recently launching a drug that could very well be a top-selling drug for the next decade to come.
Problem is that Acadia is going to have some growing pains.
The company is not going to be acquired nor will it find a massive U.S. partner with ownership interests.
It is NOT going to happen.
Instead, Acadia must go through the trial-and-error period that happens when a developmental stage biotech becomes a commercial company. That transition can be brutal when a firm is having to worry about mass manufacturing, marketing, and its supply chain. Thankfully, Nuplazid is a drug that works without the side effects of commonly used drugs like Abilify or Seroquel, and is entering a market that is no stranger to producing drugs with several billion dollars in annual revenue.
I expect the same for Nuplazid, but it will take Acadia a while to get there. Thus, ACAD stock looks very cheap around $33, and it will soar … you just have to be patient.
Best Small- and Mid-Cap Stocks to Buy Now: Five Below (FIVE)
Market Cap: $2.6 billion
Five Below Inc (NASDAQ:FIVE) is a small retailer than sells all of its products for $5 or less. The company has large store space, which means comparable-sales growth is minimal and the majority of its growth comes from expansion.
While FIVE looks expensive at 29 times forward earnings, the company is expected to grow more than 20% for each of the next two years. That’s impressive growth, and it’s why UBS just upgraded the stock with a $55 price target.
However, I think FIVE could go much, much higher.
I think Five Below is on a similar trajectory to Dollar Tree, Inc. (NASDAQ:DLTR). Still, regardless if FIVE stock trades to $55 or grows from a $2.5 billion company to become the next Dollar Tree, the point is that this dollar store has upside from here.
Best Small- and Mid-Cap Stocks to Buy Now: OpenText (OTEX)
Market Cap: $7.5 billion
Open Text Corp (USA) (NASDAQ:OTEX) is a very quiet $7.5 billion tech company. You don’t hear a lot about it, despite it being a cloud company that creates revenue with recurring services.
Unlike some of the more popular cloud services company, OTEX is highly efficient and grows by acquiring assets, optimizing those assets and combing the assets with its existing business. It has been a very lucrative business model, leading me to recently conclude that OTEX is “good as it gets for value investors.”
With expected growth of 15% this year, and the realization that next year’s expected 3% growth is too conservative after M&A, OTEX stock at 14 times forward earnings is a great opportunity.
Best Small- and Mid-Cap Stocks to Buy Now: Yelp (YELP)
Market Cap: $3.1 billion
What Yelp Inc (NYSE:YELP) has done in 2016 is very impressive, especially after two bad years in 2014 and 2015. The $3 billion review company has found itself a nice niche market, and despite heavy pressure from the likes of Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) and Facebook Inc (NASDAQ:FB), Yelp continues to grow.
While Yelp did recently raise full-year revenue expectations to growth of 27% year-over-year, the most impressive metric for me has been advertising account and user growth. The company announced with Q2 earnings that local advertising accounts grew 32% and that the number of unique devices accessing local services increased 27% monthly.
Furthermore, Yelp’s transactions business remains solid, with reservations reaching $6 billion after growing 50%. This is the business that allows users to book reservations on Yelp. Collectively, Yelp looks like a solid business, and looks to be trending higher with a 50% gain the last year.
Best Small- and Mid-Cap Stocks to Buy Now: Allegiant Travel (ALGT)
Market Cap: $2.3 billion
Allegiant Travel Company (NASDAQ:ALGT) stock has fallen 40% over the last year, mostly due to weakness in the overall airline sector. Yet, the small $2 billion airline is an exception to the problems that larger companies like Delta Air Lines, Inc. (NYSE:DAL) face.
Unlike Delta, Allegiant’s revenue miles and capacity continues to rise. Moreover, Allegiant’s revenue is expected to rise 6% this year and 10% next year. Despite its growth and clear superiority to competitors, ALGT stock trades at a very conservative multiple of just 10 times earnings.
For a company that is disrupting the airline industry, that is too cheap of a multiple, and suggests ALGT is going higher.
Best Small- and Mid-Cap Stocks to Buy Now: Skechers (SKX)
Market Cap: $4 billion
Skechers USA Inc (NYSE:SKX) has a lot of work to do. The company clearly faced pricing pressure during its second quarter after margins declined. Now, there is a lot of uncertainty whether margins will remain pressured, and whether Skechers is starting to reach a peak in its business.
These questions led me to downgrade the stock from “but” to “hold.”
Still, while there are questions surrounding Skechers, the company is expected to grow by double digits, and it has double-digit margins. Furthermore, and perhaps most importantly, SKX stock trades at just 12x forward earnings. That’s about half of Nike Inc’s (NYSE:NKE) multiple coupled with even faster growth.
In other words, if you like Nike, you must love Skechers. And because SKX is so cheap, it has a great shot to trade significantly higher long-term.
Best Small- and Mid-Cap Stocks to Buy Now: XPO Logistics (XPO)
Market Cap: $4 billion
XPO Logistics Inc (NYSE:XPO) is a $4 billion company whose stock is down 12% over the last year, but up 35% the last year. The big recent gains were driven by XPO’s first EPS-positive quarter in the Bradley Jacobs era, where the company blew past all expectations and gave a peak into what the future will look like.
It was truly a game-changing quarter for the company — one that will change sentiment. After all, there were many investors who doubted whether or not XPO would ever be profitable due to its large debt load and heavy spending.
However, $170 million in free cash flow and $42.6 million in net income silences the critics. Now, XPO stock is set for an epic rally.
As of this writing, Brian Nichols was long ACAD, FIT, FIVE, OTEX, XPO and YELP.