For investors, a little can go a long way. That’s the theory behind investing in small-cap stocks. These stocks have the ability to beat large-cap stocks over time … if you know which of these stocks to buy.
One of the reasons for this is because of their relatively low price. When these companies have even small increases in revenue, it can have a significant impact on their sales and profit. And since these companies typically have a lower stock price, a small movement of just a few dollars in their price can be a 20% or higher positive return on their investment.
The end of the calendar year is a time for investors to take stock of where their portfolio is, and where they want it to go. We’ve identified five small-cap stocks that look to finish out the year in style. Some of these companies have seen growth this year that has outpaced that of the S&P 500, and represents a much smaller investment on our part.
So without further explanation, let’s take a look at five small-cap stocks to buy as we get ready to put a wrap on 2019.
Best Small-Cap Stocks to Buy This Year: LivePerson, Inc. (LPSN)
If you’ve ever had a “live chat” online and realized that you weren’t talking to a real person, you’ve probably been exposed to LivePerson, Inc. (NASDAQ:LPSN) technology. The company uses artificial intelligence to deal with customer relations management. The company calls their technology “conversational commerce” and it allows businesses to interact with their customers at a fraction of the cost of using live agents.
LivePerson serves the needs of two demographics (milennials and Gen Z) who prefer messaging to human conversation. The company currently works with over 18,000 businesses, including Home Depot (NYSE:HD), Delta (NYSE:DAL) and T-Mobile (NASDAQ:TMUS). LivePerson is one of the best performing stocks on the market regardless of size. It is up nearly 100% year-to-date.
In the most recent quarter, the company announced that it signed more deals than it had in all of 2018, and recent comments from the company’s CEO Rob Locascio indicate the addressable market is continuing to grow. To capture this market, the LPSN is adding to its sales team, which will add to the company’s expenses in the short term. However, the company forecasts year-over-year growth in the high teens for this year and 20% growth in 2020. The company generated $249.8 million in revenue, which is up 14% from 2017.
Telaria, Inc. (TLRA)
The trend toward consumers cutting the cord is having an effect on how advertising is delivered. Which is where Telaria (NYSE:TLRA) comes in. Telaria delivers digital video solutions that address mobile, over-the-top and connected TV (CTV) content.
For the past two years, Telaria has been a revenue-generating machine. Their revenue on CTV devices increased 322% year-over-year in 2018. As of March of this year, revenue from CTV devices accounted for almost 1/3 of their revenue. And the company is forecasting an increased demand for their tools, allowing them to capture more market share.
The share price took a recent tumble, but with the revenue the company is generating, this may have been a case where the market got ahead of itself. What is more intriguing about the stock is that the consensus analyst expectation is for the company to turn a profit in 2020. This would require a growth rate of approximately 68%. While this may be a little optimistic, the company has a clean balance sheet with regard to debt and certainly looks like a low risk for investors who are concerned about investing in a company that has yet to post a profit.
Callaway Golf (ELY)
The good news for Callaway Golf (NYSE:ELY) is that they have high brand equity. They are one of the most recognized golfing brands. And their “[e]quipment and golf balls account for over 60% of its revenue.” What has some investors concerned is the added debt the company has accumulated as they’ve tried to grow through acquisition.
However, this debt appears to represent an opportunity for ELY to increase its exposure in other markets. That has been the case with their acquisition of Jack Wolfskin that increased its presence in China and Central Europe. As of March, revenue outside the United States accounted for over 50% of its sales.
Furthermore, the company has a solid balance sheet with a gross margin in “the high 40% range.” Callaway also has positive trailing-12-month net income of $90 million of net income through the first quarter of this year. Recently Raymond James raised its rating on ELY stock to an Outperform from Market Perform. The analyst firm also raised its price target for Callaway to $21, which would give the stock about a 15% bump from its current level.
When you’re looking to invest in a software-as-a-service (SaaS) company, you want to see that they have well-established products. Instructure (NYSE:INST) has two products that should be able to provide solid, repeatable revenue for the company. Its main product, Canvas, is widely used in the higher education market. And their newest product, Bridge, is starting to catch on with corporations.
But Instructure has a wide range of software products that are being used by over 4,000 colleges, universities and K-12 school systems. And each client pays the company thousands to millions of dollars. Even better news for the company is a net revenue retention rate that exceeded 100% in 2018. In fact, revenue from recurring subscriptions is over 90% of INST’s sales. And sales saw a 30% YoY increase to $210 million in 2018. The combination of the education and corporate markets gives the company an estimated $15 billion addressable market. Institutional investors are buying large volumes of shares from the company as well signaling that the stock may be on the verge of a breakout.
Rounding out our list of small-cap stocks to look at for the remainder of 2019 is Freshpet (NASDAQ:FRPT). In case you haven’t noticed, the pet industry is big business. The math is simple and favorable. There are over 300 million pets in America. The dog- and cat-food retail market is valued at over $30 billion with a compounded annual rate of growth of 6%.
That’s the pool that Freshpet is swimming in. But they’re not just swimming, they’re disrupting the market. Freshpet supplies refrigerated, fresh food options by providing refrigerators in over 20,000 retail outlets. That was a 10% YoY increase. Sales are estimated to increase by 24% in 2019.
The company’s stock was punished after it posted a second-quarter loss that was larger than expected. There was also some concern about contracting margins. However, for a long-term growth stock like Freshpet, increasing revenue should be the priority for investors. That has been the driver for a stock price that has tripled over the last three years. According to CEO Billy Cyr, “Our second-quarter results demonstrate continued momentum behind our Feed the Growth strategy. Our strategic advertising investment drove our strongest gains in household penetration and retail availability in several years, giving us tremendous confidence that Freshpet is still in the puppy stage…with significant growth ahead.”
As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.