[Editor’s Note: This article was originally published on June 1, 2020. It has since been updated to reflect the latest changes on the market.]
FAANG stocks have been dominating the headlines during the novel coronavirus pandemic, 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.” Companies just about to the change the game can be readily 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 five names that could be worth gambling on:
- Century Casinos (NASDAQ:CNTY)
- Funko (NASDAQ:FNKO)
- Mesa Air Group (NASDAQ:MESA)
- Universal Technical Institute (NYSE:UTI)
- Vera Bradley (NASDAQ:VRA)
Some of these names have game-changing catalysts around the corner. Others are value names beaten down by the coronavirus selloff. Yes, they are all “high-risk” investments. But each has the potential for big gains.
Micro-Cap Stocks to Buy: Century Casinos (CNTY)
From late May to early June, casino stocks soared as lockdown orders came to an end. But, in the weeks since, the enthusiasm has cooled a bit.
Gamblers may be slowly getting back to the table. Yet, it’s a long road back to where it was pre-pandemic. This is why major casino stocks, from MGM Resorts (NYSE:MGM) to Wynn (NASDAQ:WYNN), have pulled back.
Even so, now may be the time to make a bet on a casino industry rebound.
However, opportunities to bet on gaming stocks aren’t just limited to well-known giants. Micro-cap stocks like CNTY stock are also worth considering. 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 $4.15 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 continue to face uncertain prospects. 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 just under $6 per share. But before the outbreak, the stock sold for more many 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. Also, the company is set to release quarterly earnings and updated guidance in a few weeks. 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.
Mesa Air Group (MESA)
Like seen with gaming stocks, airline stocks were another area where things went up too fast too soon in early June. Shares in major and minor carrier saw a boost during that timeframe. But, since then, shares have cooled back, as air traffic remains sluggish.
Yet, like with casinos, this may be a “buy the dip” situation for daring investors. 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 just 27% 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 $3.30 per share) to past highs (over $10 per share) may outweigh the risk of a complete wipe-out. That makes it one of the key mirco-cap stocks to keep an eye on moving forward.
Universal Technical Institute (UTI)
It’s hard to see whether today’s recessionary environment will clear up by year’s end. Or continue to linger through 2021. But one thing’s for certain: today’s tough times economically may be a boon for many counter-cyclical stocks.
A good example is UTI stock. This company, which operates for-profit trade schools, could see a boost in today’s dire “new normal.”
How so? Based on this commentator’s estimates, continued high unemployment could translate into materially increased business for UTI. Mass unemployment means many are seeking out new skills for gainful employment. In short, this increased demand could really move the needle, and potentially push shares from single digits (under $8 per share), up to $20 per share in the next few years.
As InvestorPlace’s Josh Enomoto wrote Jul 24, blue collar workers have never mattered more. With most of the most in-demand jobs right now in the skilled trades, many factors are working in UTI’s favor. Even as the overall economy remains rough, counter-cyclical plays like this one could thrive, and produce big gains for your portfolio.
Vera Bradley (VRA)
Given the current environment, it seems risky to consider retail names like VRA stock. Yet, while scores of mall-based retailers are filing for Chapter 11 bankruptcy, that’s less of a risk with this purveyor of women’s handbags.
Granted, Vera Bradley has already seen investors pile into shares after better-than-expected results. Only to bail out, as Wall Street backtracked its previous bet on a rapid economic recovery.
So, why are shares still a buy, even after the pullback? Sales and earnings may be depressed due to coronavirus headwinds. But, these risks are more than priced into shares. As mall-based retailers get back on their feet, VRA stock could recover, bouncing back from today’s prices ($4.30 per share), back up to where it was pre-pandemic (just under $10 per share).
Sure, if retail continues to flounder, Vera Bradley shares could take another dive. But, with a relatively strong balance sheet, downside risk may be much lower than potential upside in the company’s share price. Consider this micro-cap retailer a high-risk/high-return opportunity. Nevertheless, this is one of the micro-cap stocks that could pay off if things improve sooner-than-predicted.
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.