For a second, lets just forget about FAANNG.
I know the group as a whole is doing very well this year, and has been doing well for several years now. I’m also aware that the run in FAANNG is far from over, and am bullish on all the FAANNG stocks.
But, I’m also aware that FAANNG isn’t home to the market’s biggest winners. Instead, the biggest winners are hanging out on the opposite side of the market — in the small-cap stocks section. There are a handful of stocks over there which have risen more than 100% already in 2018, and one that is up more than 1,000%.
Which stocks are they? And where are they going next?
Lets take a deeper look:
Hot Small-Cap Stocks: Turtle Beach Corp (HEAR)
Performance YTD: +1109%
Market Cap: $265 million
How It Got Here: The near 1,000% year-to-date rally in Turtle Beach Corp (NASDAQ:HEAR) is nothing short of a miracle. The premiere gaming headset company was essentially left for dead earlier this year, as evidenced by the stock price’s collapse from $70 five years ago to under $2 at the start of this year. But then Fortnite and PlayerUnknown’s Battlegrounds happened. And the battle royale gaming market boomed in popularity, causing a huge jump in consumer demand for Turtle Beach’s gaming headsets. This has caused huge financial improvements (revenues rose 185% last quarter and gross margins more than doubled), which has led to a surge in HEAR stock price.
Where It’s Going Next: Despite the big jump, Turtle Beach is still just a $265 million company being valued at around 1.3-times this year’s projected sales. Therefore, if these battle royale tailwinds persist and revenues and profits continue to climb, HEAR stock could head even higher. Earnings are expected to about $1 per share this year. Given the battle royale tailwinds, it isn’t unlikely that earnings jump to $1.50 in 2-3 years. A market-average 16-times forward multiple on that implies a 1-2 year forward price target of $24.
Hot Small-Cap Stocks: Intelsat SA (I)
Performance YTD: +358%
Market Cap: $2.2 billion
How It Got Here: The huge jump in Instelsat SA (NYSE:I) this year has been predicated largely on the potential commercialization of C-band satellite frequencies. Discussions have occurred this year between multiple companies and the FCC regarding the sharing of C-band spectrum for 5G monetization purposes. The FCC has made constructive steps towards allowing this, and it looks like a positive decision will be delivered for Intelsat by this summer.
Where It’s Going Next: This is a huge opportunity for Intelsat. But at this point in time, investing in Intelsat feels more like speculation than anything else. Further upside hinges entirely on a positive FCC decision and the ability to monetize C-band. But such upside looks minimal as the stock has already rallied more than 400% in anticipation of a positive result. Thus, downside is immense in the event of a negative result. From this perspective, where this stock goes next is a big question mark, but the risk-reward doesn’t look terribly favorable.
Hot Small Cap-Stocks: Fossil Group Inc (FOSL)
Performance YTD: +221%
Market Cap: $1.4 billion
How It Got Here: Much like Turtle Beach, traditional watch giant Fossil Group Inc (NASDAQ:FOSL) was essentially considered dead heading into this year. Secular trends were moving against traditional watch adoption, and Fossil’s business was dying as a result. But in the meantime, Fossil was building out a robust portfolio of hybrid smartwatches which integrated smartwatch functionality with traditional watch style. Demand for these hybrid smartwatches has suddenly exploded in 2018, and sent FOSL stock more than 200% higher.
Where It’s Going Next: Fossil had a big fall from a triple-digit stock a few years ago to nearly $5 earlier this year. Now, even though the stock is up near $28, it is still well off its 5-year highs. Meanwhile, it isn’t unreasonable to assume that Fossil’s hybrid smartwatch business in 5 years will be nearly as big as its traditional watch business was 5 years ago, assuming the whole watch market grows as a result of smartwatch integration. If so, Fossil stock will head a lot higher over the next several years.
Hot Small-Cap Stocks: Twilio Inc (TWLO)
Performance YTD: +125%
Market Cap: $5.6 billion
How It Got Here: Twilio Inc (NYSE:TWLO) is the king of the cloud communication space, and as such, was formerly one of the hottest stocks on Wall Street. But that hot streak abruptly ended when its biggest customer, Uber, ditched the platform and opted to in-source cloud communication services. That spooked investors, and led everyone to believe that other tech giants would do the same. But they haven’t. And Twilio’s red-hot growth story through cloud adoption trends remains red-hot. As such, TWLO stock has rebounded with serious velocity this year.
Where It’s Going Next: Competition and churn are still big going concerns for this company. And now, with TWLO stock up near $60, so is valuation. At any point, we could get another Uber situation with Twilio considering big-tech companies with tons of resources are Twilio’s core customers. If an Uber situation does happen again, then TWLO stock will drop like a rock. If it doesn’t, then upside still looks minimal because of the stock is already trading at 10-times this year’s projected sales.
Hot Small-Cap Stocks: Axon Enterprise Inc (AAXN)
Performance YTD: +139%
Market Cap: $3.7 billion
How It Got Here: The company formerly know as Taser International has dramatically changed over the past 12-24 months. The company rebranded as Axon Enterprise Inc (NASDAQ:AAXN), flipped the business focus from selling tasers to selling body cameras and accompanying cloud-hosted data management solutions, and decided to give away a free body camera to every police officer in the U.S.
Wall Street didn’t like the bold moves at first as margins got killed. But in 2018, revenue growth was remained robust and margin expansion has entered the fold, powering robust profit growth and huge share price gains.
Where It’s Going Next: This is a secular growth company with many, many years of growth ahead of it thanks to the global opportunity in modernizing and digitizing law enforcement agencies. Unfortunately, with the stock now trading at 130-times this year’s earnings estimate, that secular growth is more than fully priced in. As such, valuation friction will cause weakness in AAXN stock into the foreseeable future. But this stock looks good around $50, so any dips towards that level should be viewed as a buying opportunity.
As of this writing, Luke Lango was long HEAR and FOSL.