FAANG stocks have been dominating the headlines during the outbreak of novel coronavirus, and some investors may be temped to chase those recent gains. But if you’re looking for opportunity hiding in plain sight, consider investing in micro-cap stocks.
Granted, these names are much more volatile. Due to their small size (market capitalization of $300 million or less), their share prices rise and fall at greater speed than large-cap (market capitalization of $10 billion or more) stocks.
Yet with that high-risk comes big opportunity. And that’s true whether you like to buy growth stocks or value stocks.
For growth investors, micro-cap stocks allow you to “get in on the ground floor,” whether that’s with a biotech stock on the cusp of something big or an emerging cannabis stock that could rally on the wave of legalization. Companies just about to the change the game with new technologies can also be found when screening for micro-caps.
For value investors, micro-cap stocks are also prime hunting ground. Given their small size, Wall Street analysts ignore them and institutional players can’t invest due to size limitations.
As a result, the micro-cap space is much less efficient. And that means there is much more mispricing. It’s not hard to find a micro-cap stock trading for half of its underlying value, or even less.
With this in mind, what kinds of micro-cap stocks should you consider? Screening the markets, I found 5 names that could be worth gambling on:
- Century Casinos (NASDAQ:CNTY)
- Funko (NASDAQ:FNKO)
- Hexo (NYSE:HEXO)
- iBio (NYSEMKT:IBIO)
- Mesa Air Group (NASDAQ:MESA)
Some of these names are “hot” growth opportunities. Others are value names beaten down by the coronavirus sell-off. Yes, they are all “high-risk” investments. But each and every one has the potential for big gains.
Micro-Cap Stocks to Buy: Century Casinos (CNTY)
In the midst of March’s sell-off, casino stocks were trading at fire sale prices, given the uncertainty of if and when they could reopen.
But with “shelter-in-place” orders now being lifted around the world, it seems gamblers will be hitting the tables again sooner than later. And that’s why major casino stocks, from Wynn (NASDAQ:WYNN) to Penn National (NASDAQ:PENN) have been rallying as of late.
However, opportunities to bet on gaming stocks aren’t just limited to well-known giants. Micro-cap CNTY stock is a casino play to consider. The company, which operates casinos across the U.S., Canada and Europe, has jumped five-fold off prior lows.
But there’s still plenty of runway on the table. And not just because its casinos will soon no longer be sitting idle. Through its partnership with bet365, Century Casinos is a sports betting play as well. With the sports betting legalization wave continuing from coast-to-coast, this game-changer is another major catalyst for CNTY stock.
Shares currently trade for around $5 per share. Considering this stock traded above $8 per share pre-pandemic, there’s plenty of upside left on the table. Keep in mind casino stocks have been a crowded trade as of late. Shares could fall back as hype fades. But, for an overlooked casino stock with sports betting growth potential, keep this name on your radar.
Known for its Funko Pop brand figurines, FNKO stock is a fairly well known micro-cap name. Yet the very reason this stock has joined the micro-cap legion highlights a key risk. With the coronavirus, this company has been in a bit of a liquidity crunch.
As Seeking Alpha wrote back in April, the recent shutdowns “will severely impact the company’s sales.” Add in the high debt load and there’s a good chance this company could wind up in bankruptcy down the road.
So why invest in such a high-risk opportunity? While shares could go to zero if bad times continue, a faster-than-expected recovery could send shares soaring. Right now, the stock trades around $5 per share. But before the outbreak, the stock sold for more than three times that, at prices above $15.50 per share.
Things are already moving in the right direction. With a reworked credit agreement, the company should be able to ride things out and avoid Chapter 11. Keep in mind that Funko was already disappointing investors before the virus, so even a modicum of improvement could mean potential gains outweigh the substantial downside risk.
In short, don’t bet the ranch on FNKO stock. But consider it a high-risk opportunity for three-digit gains if the company survives today’s tough times.
Like Funko, Hexo is another well-known stock that’s fallen to the micro-cap level only recently. When pot stocks were riding strong, this was one of the major names to consider. But, as “Cannabis 2.0” in Canada proved a bust and U.S. legalization remained a pipe dream, shares took a bath. Big time.
Falling about 90% in the past year, Hexo went from “hot stock” to “penny stock.” But at today’s bargain-basement valuation, the potential upside could vastly outweigh a total wipeout. What am I talking about? The company’s recent equity offering, as well as a potential U.S. legalization catalyst.
Typically, I’m skeptical of equity offerings. Raising money via stock sales causes dilution. Dilution can in turn reduce the potential gains for a stock.
Yet when a company desperately needs cash, dilution may be the lesser of two evils. With enough capital to survive, they can continue “playing the game,” waiting out today’s challenges for tomorrow’s opportunities.
What would that look like for Hexo? The potential for U.S. legalization. Many states have legalized recreational marijuana use, but it remains a controlled substance on the federal level.
However, with this year’s U.S. Presidential election possibly changing which political party controls the White House, the odds of legalization could soon move in the pot stock’s favor.
Federal legalization wouldn’t mean overnight profits for Hexo. But such a game-changer would really move the needle. With the potential for shares to rebound many times over their current share price, this is one micro-cap name worth a gamble.
Again, I wouldn’t go hog wild. But a small position could wind up being a highly-profitable investment.
As one of the top coronavirus vaccine plays, consider IBIO stock an “all or nothing” situation. Let me explain.
Almost all of the company’s current valuation comes from its potential success with a viable vaccine for the pandemic. And considering the competition, including large, well-connected names like Moderna (NASDAQ:MRNA), this company is practically the underdog in this vaccine horse race.
Yet while shares have been bid up by speculators, this stock still offers the opportunity for tremendous gains if it proves its critics wrong.
As our own Louis Navellier wrote May 26, the company’s focus on rapid production could be its ticket to success. Assuming its IBIO-200 vaccine is brought to market, of course! But even a small dose of positive news could send this stock to gamble on substantially higher in the near-term.
Of course, the key word here is “gamble.” The flipside of iBio is the potential for shares cratering back to pre-pandemic pricing.
Before the outbreak, shares changed hands around 30 cents per share. Considering the stock trades for about $1.64 per share today, that’s a lot of downside risk!
Nevertheless, the potential for shares to rally further may outweigh the downside risk. Practice caution, but keep this micro-cap name on your radar.
Mesa Air Group (MESA)
In recent weeks, investors have piled back into airline stocks. While air travel remains depressed due to the coronavirus, things may be picking up as lockdown orders come to an end. But while major legacy carriers could move substantially higher as we “return to normal,” lesser-known names like MESA stock may also offer greater potential for big gains.
Mesa operates regional flights on behalf of American Airlines (NASDAQ:AAL) and United Airlines (NASDAQ:UAL). The company’s shares cratered alongside better-known airline stocks as the novel coronavirus outbreak led to empty flights and massive cash burn.
But thanks to payroll support and loans offered by the CARES Act, the struggling regional carrier could also ride out the storms like its larger peers. Granted, as I’ve written in prior airline stock analysis, it could be many years before the industry rebounds. The company itself said in a recent earnings call that traffic will only bounce back to 50% at best by year’s-end.
Yet the company’s current tough prospects could be more than priced into shares. Trading for less than one-third of book value, in exchange for high-risk, you can buy into MESA stock at a low valuation.
Again, this is no slam-dunk opportunity. If the industry remains up in the air for longer than anticipated, this company could wind up in Chapter 11. Nevertheless, the potential for shares to rally from their current price (around $3.75 per share) to past highs (over $11 per share) may outweigh the risk of a complete wipe-out.
Thomas Niel, contributor to InvestorPlace, has written single-stock analysis since 2016. As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.