Editor’s note: This story was previously published in March, 2019. It has since been updated and republished.
The stock market has been a charging bull since 2019 began. Given how 2018 ended, this has been quite a surprise. Much of the selloff was explained by expectations that Q4 wasn’t going to be strong and that growth in 2019 would be diminished. And most of the numbers that are coming in reinforce that view.
So, why is the market charging ahead as if there’s nothing to fear?
Because things are going according to plan. The market hates uncertainty. Even less than ideal certainties are better than pleasant surprises.
And that’s why small-cap stocks — which usually do best in times of strong economic expansion — continue to do well, even now. As long as the market knows the economy isn’t going to hit bumps that slow it one quarter and grow it the next — forcing the Federal Reserve out of its complacency — stocks can chug along happily.
The seven small-cap stocks that make the grade below are all highly rated momentum stocks in my Portfolio Grader. They should see big gains as this “Goldilocks economy” continues.
Alarm.com (NASDAQ:ALRM) is a wireless and cloud-based security system company that focuses on residential and commercial properties.
It’s based in Northern Virginia, which hosts many of the suburbs of Washington, D.C., and there are plenty of expensive houses that got the company off its feet 19 years ago. Since then, it has scaled up its business and diversified both its customer and geographic base.
Now the company has expanded into the smart property market, using its security systems to enable homeowners and business owners the ability to remotely monitor and manage a variety of systems.
By expanding its footprint nationally and keeping up with the latest technological breakthroughs, ALRM remains one of the fastest growing security systems in the market.
ALRM stock is up 69% in the past 12 months, and roughly 34% year to date, so it is solidly performing on its own merits, not just rising with higher tide of the broad stock market.
AppFolio (NASDAQ:APPF) is the next iteration of cloud-based software solutions companies.
The first wave saw companies simply moving some parts of their data to the cloud so that it was more accessible and provided an offsite back-up for corporate-based servers.
The next wave is companies that are targeting specific industries with cloud-based solutions that are built for these niche industries. And that is where APPF comes in.
It caters to small- and medium-sized businesses in the property management and legal sectors. This sector hasn’t generally been at the top of the cloud providers priority list, since enterprise-level companies are a much bigger fish to land. And while there are plenty of these firms around the U.S., the time and energy to build something at their price point and with custom features just wasn’t worth the money.
APPF tapped into this market, and it’s doing very well with its line of products. APPF stock is up almost 70% in the past year and is up 63% year to date.
DSW (NYSE:DSW) is a pretty familiar name to most consumers. It is one of the largest shoe stores in the U.S., with over 500 locations across the country.
As the big-box department stores started their demise, companies like DSW saw an opportunity to move into a specific niche that was no longer being served well by department stores.
You see, as much as ecommerce hurt department stores, so did the fact that they didn’t have the ability to dig down into their offerings. They could provide some choices, but consumers were getting used to searching out variety online or in a dedicated store.
DSW filled that need perfectly, and its ecommerce site allows shoppers to go the ecommerce route if they so desire.
But remember, this is a discount shoe retailer, not a tech firm. It hasn’y had a great year, down 8% in the last 12 months, but it delivers a very respectable 4.6% dividend. As a total return play, this is a great long-term buy.
Intercept Pharmaceuticals (ICPT)
Intercept Pharmaceuticals (NASDAQ:ICPT) is a biopharmaceutical company that focuses on non-viral liver diseases. It currently has Ocaliva on the market which is treats a handful of these diseases and has little competition in the space.
It was also in Phase 3 trials with a new drug for a fatty liver disease called Nonalcoholic steatohepatitis (NASH), and was competing with a similar drug from Gilead Sciences (NASDAQ:GILD). When Gilead announced that its drug had failed, things looked bleak.
Until ICPT announced its drug had passed the trials. That leaves NASH treatment in the hands of ICPT for now.
Bear in mind, this is a biotech that is very focused. Right now, things are back to being tough, though. The stock is up just 12% for the year and actually down 13% year to date, since it has been more volatile on this NASH news.
There’s plenty of opportunity here, even for a buyout by a bigger firm, so enjoy the ride but remember, it will be bumpy.
Restoration Hardware (RH)
Restoration Hardware Holdings (NYSE:RH) is the holding company for what’s better known to consumers as Restoration Hardware. It maintains an enormous and sumptuous product catalog that it distributes as an RH brand.
The company has been around since the 1979 and made a good run at expanding smaller retail outlets in upper-middle-class malls and shopping districts around the country. But when the tech bubble burst and then the financial crisis hit, RH had to go back to the drawing board — adapt or die.
And it adapted. RH rebuilt as a brand for its ideal customers – high-end and aspiring high-end consumers. It closed many of its smaller locations and opened glorious showpieces around the country that showed off the furniture and accessories as well as offered interior designers to help with building out rooms and homes. Most also have lovely restaurants as well.
This boutique treatment has paid off in the past, but the last 12 months haven’t been as kind. RH is essentially flat in the past year, but if the economy once again shows signs of strength, it will be back big.
NuStar Energy LP (NS)
NuStar Energy LP (NYSE:NS) is a midstream energy company that operates as a limited partnership.
Basically, that means NS operates pipelines and storage for petroleum and anhydrous ammonia. Anhydrous ammonia is made from natural gas and steam and is used as a fertilizer.
As for the limited partnership piece, that means NS is structured so that stockholders are looked at as owners and get net profits distributed to them in the form of a dividend. This means shareholders aren’t “double taxed” on their gains.
With U.S. energy production growing and exports also growing, the U.S. energy patch is in a bull market, especially with prices in the upper $50’s. Also, NS stock should see some strength in its fertilizer business as the economy expands and spending is solid.
Right now, NS is delivering a whopping 9.1% dividend, and that’s after a 23% run on the stock year to date. Just remember this stock will be a bit volatile since it’s a smaller energy company that will be influenced by energy prices and demand.
Cleveland-Cliffs (NYSE:CLF) has been around since 1847. And it’s very likely you have never heard of it.
Why? Because it has done one thing in all that time, and unless you’re a domestic steel company, its name likely never came up.
Granted the U.S. steel industry has been through some significant ups and downs over the past 50 years. But the thing about a company like CLF, which has seen its share of good times and bad times over the past 172 years, is it knows how to adapt.
CLF supplies iron ore pellets to the U.S. steel industry. Its mines are in Michigan and Minnesota. It pelletizes the ore in a production facility in Ohio, and the headquarters is in Cleveland.
That means all its production and distribution is U.S.-based. That keeps things simple in what can be a very complex global market.
This is certainly one sector that has benefited from the U.S.-China trade war, with CLF up 22% in the past year. And it’s still trading at a 2.64 P/E. But remember, this is a commodity-based company, so the P/E isn’t going to reach big double-digits.
In January a major global steel company cut steel production by about 40 million tons a year because of dam disaster at one of its properties in Brazil. That spells opportunity for CLF for 2019 and beyond. It also pays a solid 2% dividend.
Louis Navellier is a renowned growth investor. He is the editor of four investing newsletters: Growth Investor, Breakthrough Stocks, Accelerated Profits and Platinum Growth. His most popular service, Growth Investor, has a track record of beating the market 3:1 over the last 14 years. He uses a combination of quantitative and fundamental analysis to identify market-beating stocks. Mr. Navellier has made his proven formula accessible to investors via his free, online stock rating tool, PortfolioGrader.com. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.