Large companies in your portfolio can provide risk diversification through low beta and stable cash flows. On the other hand, though, small-cap stocks generally have high beta, and can be potential portfolio game-changers.
As the world crawls back to normalcy after the novel coronavirus triggered lockdown, equities have surged higher. That said, this is possibly one of the best times to consider small-cap stocks for your portfolio, as renewed global growth can trigger upside in quality names.
Below I will discuss four small-cap stocks that can outperform the index in the coming years. They are:
With all of that in mind, let’s dive in.
Small-Cap Stocks to Buy: QEP Resources (QEP)
The coronavirus-driven recession has triggered a sharp downside in oil prices. But as oil gradually starts to trend higher in the future, there are several attractive names to consider in the energy industry. That said, QEP stock is worth considering among the smaller companies.
With strong presence in the Permian and Williston Basin, the company has a quality asset base to deliver long-term value. It’s worth noting that even for the first quarter of 2020, the company reported 21% production growth from the Permian year-over-year.
Collectively, lower oil prices will impact the growth trajectory in the near-term. However, the company has strong financial flexibility to pursue aggressive growth in the coming years. As of March 2020, the company reported total liquidity of $308.9 million. In addition, the company had $1.25 billion in undrawn credit facility.
So with strong fundamentals to navigate current challenges and with a quality asset base, QEP stock is worth considering.
I want to add here that even for fiscal year 2020, the company is expecting to generate free cash flow of $100 million. And as oil trends higher and production increases, the company is positioned to be a value creator.
Flex LNG (FLNG)
Flex LNG, which is the owner and operator of LNG carriers, is another attractive small-cap stock. While FLNG stock has underperformed in the past year, I believe that the coming years are likely to be rewarding for shareholders.
As of Q4 2019, Flex LNG had six LNG carriers in operation. In addition, the company had seven LNG carriers under construction. This is the first major reason for a bullish view. And as these seven new carriers are delivered through FY2021, there will be a steady growth in top-line and EBITDA.
Importantly, the company has limited new vessel capital expenditure due, which implies minimal financing concerns. With demand for LNG likely to be robust in emerging Asia for the coming decade, there is ample scope for growth.
From a balance sheet perspective, the company has ample liquidity buffer with a equity ratio of 51% — which gives scope for leveraging. Furthermore, for FY2019, the company reported operating cash flow of $51.5 million. And as new LNG carriers are delivered, the OCF can potentially double by FY2022.
In turn, this should translate into FLNG stock upside and dividend increases in the coming years. And these factors make the stock worth considering for your portfolio.
Small-Cap Stocks to Buy: Aurora Cannabis (ACB)
After a massive decline of 85% in the past year, ACB stock fits well into the small-cap stocks category. However, its too early to believe that Aurora Cannabis cannot bounce-back from current headwinds.
I am of the view that the worst might be over for cannabis stocks. The first reason to be positive on ACB stock is the company’s focus on cost cutting. In the recent past, cash burn has been the biggest challenge for the company. So with the company now focusing on few markets and cutting cost, the outcome is likely to be positive.
Another positive trigger for the company is the launch of value-added products. These are called Cannabis 2.0 products, and they include vapes, concentrates and edibles. If these product gain market acceptance, the company’s EBITDA margin is likely to expand. Furthermore, cash burn can potentially decelerate.
I also like Aurora Cannabis for the company’s approach towards medicinal cannabis. With clinical trials, the company is focused on evidence backed medicinal cannabis. This is the only way the medicinal cannabis business can gain growth traction.
Overall, ACB stock is attractive after a massive correction, and medium to long-term exposure can be considered at current levels.
Costamare (CMRE)
Costamare is another company worth considering among quality small-cap stocks. The company is a leading owner of shipping containers with a fleet of 75 vessels, including five under construction.
The first reason to like CMRE stock is the predictability of revenue and cash flows. As of April 2020, the company reported a total order backlog of $2.1 billion with an average duration of 3.4 years. That said, this backlog ensures steady cash flows in the coming quarters.
Another reason to like CMRE stock is the company’s dividend. With an annual dividend payout of 40 cents, the stock has a current dividend yield of 8.25%. And with revenue visibility, those dividends are likely to sustain.
Moreover, from a balance sheet perspective, I don’t see any concerns. The company has a net debt-to-EBITDA of 3.39. Leverage is also not a concern, with EBITDA interest coverage ratio at 4.93.
Overall, with steady growth in seaborne trade globally, Costamare is well-positioned to benefit. And in the coming years, dividends will grow as cash flow swells. So with all of that in mind, CMRE stock is likely to trend higher from current levels.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modelling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector. As of this writing, he did not hold a position in any of the aforementioned securities.
