The iShares Micro-Cap ETF (NYSEARCA:IWC) is the largest U.S.-listed exchange-traded fund that invests exclusively in micro-cap stocks. It’s invested $701 million in 1,272 companies with market capitalizations ranging from as low as $4 million to as high as $4.6 billion.
IWF tracks the performance of the Russell Microcap Index, which is comprised of the 1,000 smallest stocks in the Russell 3000, plus the next 1,000 smallest stocks in the universe of U.S.-listed equities. For this article, I’ll be suggesting 10 micro-cap stocks with market caps between $50 million and $300 million, based on the traditional definition of micro-cap.
Why invest in stocks this small?
Well, for starters, Apple (NASDAQ:AAPL) was once a micro-cap. A $10,000 investment in Apple when it went public in December 1980 would be worth approximately $9.3 million today.
Sometimes small businesses turn into large ones. That said, I wouldn’t invest thinking you’re getting the next tech superstar. Instead, it’s a reminder of what can happen if you have a long-term perspective and remain patient.
Investors looking for value and growth should seriously consider these 10 micro-cap stocks to buy:
- Duluth Holdings (NASDAQ:DLTH)
- 180 Degree Capital (NASDAQ:TURN)
- Silvercrest Asset Management (NASDAQ:SAMG)
- Elevate Credit (NYSE:ELVT)
- Park-Ohio Holdings (NASDAQ:PKOH)
- Points International (NASDAQ:PCOM)
- Five Star Senior Living (NASDAQ:FVE)
- Ruth’s Hospitality Group (NASDAQ:RUTH)
- Ethan Allen Interiors (NYSE:ETH)
- BBX Capital (NYSE:BBX)
The future growth trajectory of micro-cap stocks can be difficult to predict. For this reason, my selections are mostly consumer-facing businesses — no semiconductors or biotechs in the bunch. A few of them, I’m sure you recognize.
Micro-Cap Stocks to Buy: Duluth Holdings (DLTH)
Duluth Holdings is the holding company for Duluth Trading, a Wisconsin-based lifestyle brand whose history goes back to 1987. It started with the invention of the Bucket Boss, a tool belt attached to a drywall bucket, that made it easier for workers to carry their tools on a job site.
The name comes from the fact that the company was originally based in Duluth, Minnesota, but moved to Wisconsin in 2000 when entrepreneur Steve Schlecht acquired it.
Today, the company operates 58 retail stores, three outlet stores and an e-commerce website, DuluthTrading.com.
As you might imagine, the novel coronavirus has eaten into brick-and-mortar sales. However, thanks to strong online and catalog business (31.7% quarterly increase), Duluth’s first-quarter results only fell by 3.8% to $109.9 million.
Year-to-date through July 8, DLTH stock has a total return of -36.5%.
180 Degree Capital (TURN)
By no means do I think you should throw your entire portfolio into 180 Degree Capital. To be candid, I had never heard of TURN, but it came up on my micro-cap screen, so I took a closer look.
On the front page of the website are the words, “Value Creation Through Constructive Activism,” whatever that means. They almost made me run away because activist investors tend to give me the creeps.
However, in the recent news section, I noticed that it was recently selected to manage $25 million for a pension fund. The capital would be invested in small, publicly-traded companies alongside 180 Degree’s permanent capital.
More wins like this and eventually, who knows? The company might become a smaller version of Brookfield Asset Management (NYSE:BAM).
Interestingly, one of its best investments to date was in The Street, a direct competitor of InvestorPlace, which was sold to theMaven (OTCMKTS:MVEN) in June 2019.
Like I said, this one requires a lot more due diligence, but it’s got the look of a diamond in the rough.
Silvercrest Asset Management Group (SAMG)
The second of two asset management plays, Silvercrest Asset Management manages more than $25 billion for family offices, endowments, foundations and other institutional investors.
Silvercrest’s chief executive officer is Richard R. Hough III. I wouldn’t know Richard if I ran into him on a Manhattan street, where the company is based. However, what I do know is that Hough has been with the firm since 2003, and CEO since 2013.
Continuity is critical in the asset management business. Wealthy families don’t want to see turnover, they crave stability. Hough’s tenure speaks to the company’s focus and dedication to its clients.
Of course, it’s always important to answer the why of making a particular investment. What makes Silvercrest worthy of investment?
Just look at its first-quarter results on a year-over-year basis.
Revenues are up 25.7%. Adjusted net income is up 56.2%. Average assets under management are up 15.1%. And it pays a quarterly dividend of 16 cents, which currently yields 5.7%.
Elevate Credit (ELVT)
I can’t tell you why, but Elevate Credit feels incredibly familiar, though I know I’ve never heard of it before.
Elevate uses industry-leading analytics to originate credit to non-prime consumers. To date, it’s provided $8.4 billion in credit to 2.5 billion customers since its founding by its former parent Think Finance in 2001. Elevate was spun-off from Think in 2014.
Elevate estimates that it has saved customers $7 billion by not obtaining more expensive payday loans.
On June 29, Elevate announced that it would take a $10 million impairment charge as part of its exit from the U.K. loan market. In the first quarter, it had a $9.3 million impairment loss on its U.K. subsidiary.
On an adjusted basis, Elevate had adjusted net income of $7.6 million in the first quarter, down 43% from a year earlier. Not surprisingly, Elevate has a year to date total return of -66.7%.
However, its core business in the U.S., despite Covid-19, appears healthy. Under $2, it could be an excellent turnaround play.
Park-Ohio Holdings (PKOH)
Park-Ohio sounds like a holding company name if there ever was one. However, it turns out that the company is in the supply chain logistics business.
Based in Cleveland, Park-Ohio has more than 7,000 employees working from 125 locations around the world. In its most recent fiscal year, it generated $1.6 billion in sales.
The company got its start in 1907 as Park Drop Forge, a company that made closed die forgings for camshafts and other truck parts. In 1920, Ohio Crankshaft was created to make the camshafts for diesel trucks. The Park-Ohio name came in 1967 when the two companies merged.
Today, Park-Ohio operates three businesses: Supply Technologies (38% of sales), Assembly Components (35%), and Engineered Products (27%). These same businesses generated $9.2 million, $6.3 million and $3.8 million respectively in operating income for the quarter ended March 31.
Both sales and profits were hit hard by Covid-19. That’s why PKOH has a year-to-date total return of -55.2%.
However, it has a diversified trio of revenue streams that will bounce back. And historically, Park-Ohio’s valuation metrics have never been lower. There is no better value buy in this group of stocks.
Points International (PCOM)
The only Canadian company on the list, Toronto-based Points International is an interesting opportunity for investors.
PCOM provides a platform for companies to run their loyalty programs. It boasts a “who’s who” of hospitality clients, including Southwest Airlines (NYSE:LUV), Delta (NYSE:DAL) and Hyatt Hotels (NYSE:H). Worldwide, it has more than 60 loyalty programs tied into its Loyalty Commerce Platform.
Over the past five years, its grown revenues by 10% compounded annually, generated a five-year average annual return on common equity of 19.1% and increased net income by 21% per year.
Essentially, the airlines and hotels can turn their loyalty programs into profit centers by utilizing the company’s platform. In 2019, Delta had loyalty revenues of approximately $9.1 billion, 19% of its overall sales for the year.
Can you say, “Ka-ching?”
Down 32.2% year to date, Points’ stock has been a real disappointment over the past five years despite the growth it’s exhibited on both the top and bottom line. Thanks to Covid-19, the company’s business activity will be dramatically lower until the airlines and hotels can get their businesses up to speed.
That’s the most significant risk of owning this stock: you’re tied to the success or failure of their clients. Tread carefully on this one.
Five Star Senior Living (FVE)
In the middle of a pandemic, a company that operates senior living communities isn’t the first investment opportunity most micro-cap investors would gravitate to. However, Massachusetts-based Five Star Senior Living is in the middle of business transformation that could reverse the downhill slide its stock’s been on for the past decade.
Over the years, Five Star has had trouble profitably operating its 265 senior communities across 32 U.S. states. Part of the problem is that it had triple net leases with Diversified Healthcare Trust (NASDAQ:DHC) that put a heavy burden on the company.
To fix the problem, Diversified agreed to terminate master leases on 261 of those properties, implementing a new arrangement in which Five Star would continue to manage the properties but no longer lease them.
In return, the REIT upped its ownership stake in Five Star to 85%. Diversified then distributed 51% of its equity in Five Star to its shareholders, keeping the rest for itself. At the same time, Five Star’s been working to sell almost a billion dollars in properties that it owned.
In essence, Five Star was headed for bankruptcy. Diversified’s sweetheart deal put both companies in a stronger position to benefit from their long-time relationship.
This one could be a sleeper over the next few years.
Ruth’s Hospitality Group (RUTH)
The well-known steakhouse chain was in the news recently, but for all the wrong reasons. It seems that the company took $20 million in loans from the Paycheck Protection Program (PPP) and was shamed into giving it back after several media outlets reported the transgression.
In fairness, it wasn’t the only public company that took money under the PPP. A total of 71 public companies took funding before the $350 billion in funding from the Small Business Administration ran out. Many of those companies, like Ruth’s Hospitality, have since returned the funds.
Like many of the smaller companies on this list, Ruth’s stock has been pummeled in 2020. Year to date, it has a total return of -68.2%. The drop’s been so swift, the company’s five-year annualized total return is -11.6%, almost 23 percentage points worse than the markets.
Ruth’s comparable restaurant sales in March fell 50.5% due to Covid-19. However, in the first two months of the first quarter, comparable restaurant sales increased by 2.2%. Good, if not great, results. In April, post-quarter, comps fell 83.5%.
To stem the tide, the restaurant chain has stopped all restaurant construction for the remainder of the year. That will save it approximately $35 million.
The Ruth’s Chris brand is too strong not to make a comeback. This could be the turnaround story of 2021.
Ethan Allen Interiors (ETH)
This home furnishings manufacturer had to take several steps during the pandemic to keep the business running, including furloughing 70% of its global workforce. That includes employees working at its 300 design centers in the U.S. and elsewhere, along with those people at its nine manufacturing plants in the U.S. (6), Mexico (2) and Honduras (1).
CEO Farooq Kathwari has seen a lot of turbulence in his 22.5 years in the top job. If anyone can guide Ethan Allen through this crisis, it’s this man. And it doesn’t hurt that Kathwari owns 2.6 million shares or almost 10% of its stock. With ETH down 41% year-to-date on a total return basis, he’s got a financial stake to rebuild.
The one thing I would keep in mind while analyzing Ethan Allen’s business is that sales over the past five years have flatlined and operating income margins had fallen from a high of 11.2% in 2016 to 4.5% in 2019.
If ever there were a time to give itself a makeover while also rightsizing its business, now would be it. If the veteran CEO doesn’t act decisively in the second half of 2020, you can be sure active investors will make him act.
One way or another, this stock is going higher.
BBX Capital (BBX)
This last one is a bit of a wildcard. It has many different pieces that should add up to more than $233 million in market cap and $790 million in enterprise value, but that’s where we are.
Clearly, its management, insiders and the board realize this to be the case, because on June 17, BBX announced a significant move to deliver value for shareholders. The company will split into two separate publicly-traded companies.
The first will hold its 90.3% ownership stake in Bluegreen Vacations (NYSE:BXG), one of the world’s leading vacation ownership companies. It will be called Bluegreen Vacations Holding Corporation. The second will assume the name BBX Capital Corporation and will hold all of the other businesses and investments.
For each share held in the current company, shareholders will receive one share in the new BBX Capital.
At present, 90.3% of Bluegreen Vacations’ enterprise value of $880 million is $795 million. That’s $5 million more than BBX Capital’s current enterprise value. So, investors are getting BBX Capital Real Estate, BBX Sweet Holdings and Renin Holdings for free.
If you’re a patient investor, BBX Capital should pay dividends down the road. That being said, I probably wouldn’t put this one in your retirement account.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.