Among publicly tradable securities, perhaps none are more enticing than small-capitalization firms, or colloquially, small-cap stocks. Though specific definitions vary, these investments typically describe companies with market values between $300 million and $2 billion.
Why would anyone want to risk their money on these speculative offers? The most obvious answer is profitability potential. Larger companies usually enjoy greater resources, and analysts as a collective force have vetted every detail. Not many surprises exist, which means these blue chips provide relatively stable trading dynamics.
On the other hand, smaller firms, especially hot small-cap stocks, have an information “blackout.” Analyst coverage is limited, if one is even on tap. Moreover, upstart organizations suffer a credibility gap. Almost always, they promise much upfront, but their ability to deliver over the long run remains questionable.
However, this lack of information also represents the greatest strength for small-cap stocks. Like anything in life — betting on a racehorse or drafting a franchise quarterback — higher risks can yield higher rewards.
In addition, if you’re not about to retire, a controlled exposure to hot small-cap stocks is prudent. Unlike their well-capitalized counterparts, smaller firms provide explosive profitability potential over a short time frame. What it would take a Dow Jones blue chip to accomplish in 10 years can be realized within a matter of months, or even weeks.
That said, you want to know when to pull the trigger, and when to call it quits. Here are five small-cap stocks that are on fire, but you shouldn’t buy until the time is right:
Due to its sub-$2 billion market value, Crocs (NASDAQ:CROX) fits within the accepted range of small-cap stocks. Despite my personal styling reservations, Crocs’ signature shoes — the clog-like ones manufactured with holes in them — have fit well with customers.
As a result, CROX stock has absolutely dominated Wall Street. Last year, shares doubled in value. More impressively, Crocs continued to deliver the goods throughout 2018, and carried positive momentum into the current year. So far this month, CROX has gained 8.6%.
At the same time, every good thing must come to an end. CROX stock has gone too far too fast. Earlier in January, the shoemaker received a price-target upgrade from $25 to $31. Right now, we’re very close to meeting this forecast.
I can dive into further details, but in this case, common sense provides the best argument. Without question, CROX is one of the most intriguing hot small-cap stocks. But right now, it’s overheated.
Fossil Group (FOSL)
Famous for its stylish but accessible wristwatches, Fossil Group (NASDAQ:FOSL) has previously generated envious returns. That’s not surprising considering its $800-plus million market cap. But last year, the watchmaker suffered a schizophrenic episode.
In the first half of 2018, FOSL stock skyrocketed nearly 244%. But poor revenue guidance sparked a rapid deterioration in sentiment, with the second half witnessing a 41% drop. Yet Fossil Group appears to have once again won over investors. Since Christmas Eve, shares have jumped nearly 27%.
Should speculators trust FOSL stock? While shares have once again entered the realm of hot small-cap stocks, a major headwind is competition. We know that Fossil has significant smartwatch cred as evidenced by Alphabet’s (NASDAQ:GOOG, NASDAQ:GOOGL) recent deal with them. However, smartwatches aren’t unique and it’s a crowded sector.
Boyd Gaming (BYD)
With a market cap of $3 billion, gaming and hospitality outfit Boyd Gaming (NYSE:BYD) is one of the more well-resourced small-cap stocks. Given its exposure to the “vice” industry, BYD stock has natural appeal for speculators.
When the economy is chugging along, consumer confidence increases, potentially resulting in higher gambling revenues. But if economic conditions deteriorate, the euphemistically-labeled “hospitality” industry offers escapism.
Therefore in theory, BYD stock should witness sustained growth. Unfortunately, the second half of 2018 proved otherwise. After questions about economic stability surfaced, Boyd tumbled badly, shedding nearly 39%.
However, Santa put BYD in his “nice” list. Since Christmas Eve, shares have blown up in a good way, delivering 39% returns for embattled shareholders. So is this evidence of a turnaround?
I’m hesitant. Recent events like the unprecedented government shutdown have demonstrated that we’re not walking on sound territory. As such, I’d wait before diving into a company so levered to consumer sentiment.
H&E Equipment Services (HEES)
Among hot small-cap stocks, H&E Equipment Services (NASDAQ:HEES) enjoyed a memorable run following President Donald Trump’s electoral victory. A day after the historic but contentious election, HEES stock jumped nearly 18%.
It’s easy to see why speculators loved H&E Equipment Services. The former real-estate mogul promised big plans for his administration, chief among them the border wall. Additionally, the President has espoused a roll-up-your sleeves, “git r done” attitude. Such powerful support from the top naturally boosted HEES stock.
But last November, the Democrats secured a critical victory in the midterm elections, winning a House majority. As we’re witnessing with the ongoing government shutdown and associated negotiations (ie. finger pointing), Trump is unused to direct resistance. That puts H&E Equipment in a tough position.
Moreover, we’re not seeing any political headway. As it stands, we have a stubborn president and an unreasonable opposition party. So despite its massive leap forward in January, you should wait for the likely cool-off phase.
Arrowhead Pharmaceuticals (ARWR)
Similar to other small-cap stocks, Arrowhead Pharmaceuticals (NASDAQ:ARWR) had a split personality in 2018. During the first half, ARWR stock shot into low-earth orbit, profiting speculators nearly 269%. But in the second half, Arrowhead didn’t really move the needle, eventually losing more than 9%.
However, recent market data suggests that ARWR stock is back to its winning form. So far this month, shares are up over 19%. Is now the time to jump aboard one of the most intriguing hot small-cap stocks?
On one hand, I really love the company’s biotech cred. Arrowhead specializes in RNA interference, or RNAi. This describes the natural mechanism in which living cells suppress a specific gene’s activities. ARWR leverages this mechanism to help combat certain debilitating diseases.
But on the flip side, meeting clinical requirements is always a tough business. Moreover, insiders have been dumping their shares since 2015. I think the wiser approach is to hold off and wait.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.