Micro-cap stocks are inherently risky ideas that suit speculators looking for a quick gain. But to start, look beyond their stock price and instead at stock price multiplied by shares outstanding. Then review the five to 10-year chart to find out when things went south for the company.
Asking why the company’s valuation sank at a particular point in its history will help decode if it’s worth taking a chance on today.
The markets will discard and ignore a company whose business model has broken down. It will get little to no Wall Street coverage, and often trade at low volumes. But if the business is on a comeback as-yet unnoticed by the wider markets, these companies can reward investors in a big way.
Here are 7 micro-cap stocks you may want to take a chance on:
- XBiotech (NASDAQ:XBIT)
- RADA Electronic Industries (NASDAQ:RADA)
- Liquidia Technologies (NASDAQ:LQDA)
- Arlo Technologies (NYSE:ARLO)
- Ituran Location and Control (NASDAQ:ITRN)
- Sierra Wireless (NASDAQ:SWIR)
- Veritone (NASDAQ:VERI)
Turnaround plays abound in our coronavirus-hit market, but there are some obvious signs to keep an eye on. For example, when a company sheds assets and cut costs, that is a start. It also needs to pivot from a money-losing business to a potentially profitable one.
XBiotech peaked at $26.40 earlier this year but the stock has fallen on hard times since. The reason for the stock soaring was its “modified Dutch auction” offer to buy back $420 million worth of shares.
Offering to pay between $30.00 and not more than $33.00, when the stock closed at $18.62, created a unique arbitrage opportunity. But when investors tendered 41,164,725 shares, the company only planned to buy around 31% of those shares.
Investors may turn to a multiple valuation model:
|Selected LTM Revenue Multiple||16.0x – 20.0x||17.0x|
|Selected Fwd Revenue Multiple||7.4x – 9.0x||8.2x|
|Fair Value||$15.47 – $17.14||$16.09|
In the Revenue multiple model, investors may choose a variety of other similar biotechnology companies to come up with a fair value. At $16.09, XBIT stock has modest upside ahead. But if investors want to assign a higher multiple to reflect a more optimistic outlook ahead, the fair value will go up.
Today, the company’s prospects depend on its partnership to develop a potential COVID-19 treatment. The investigative program is based on natural antibodies from recovered patients.
In collaboration with BioBridge Global:
“Plasma collected from these donors by the South Texas Blood & Tissue Center (STBTC), which also is a subsidiary of BioBridge Global, could be used to treat patients with serious and/or life-threatening COVID-19 infections. STBTC will, in return, provide blood samples to XBiotech to enable the development of a candidate True Human™ antibody therapy for the disease.”
According to Stockrover, Xbiotech stock has an 89/100 quality score, based on a 23.7% gross margin and return on assets of 188.2%:
As shown above, Xbiotech enjoyed a high return on assets after an asset sale to Janssen gave the company $750 million in Dececember of 2019.
The stock has a seasonal strength in December, as it typically returns more than 10%.
RADA Electronic Industries (RADA)
RADA Electronic has enjoyed a steady uptrend since the V-shaped stock market recovery back in March. The company posted revenue growth of 73.4% year-over-year to $15.07 million in the first quarter.
Rada is a global defense technology company focused on tactical radar. The company is chasing after a market with addressable business totaling at least $5 billion. After revenue grew 125% Y/Y in 2019, it expects to grow again by at least 65% this year.
The development of four new radar systems should support this growth trajectory. Rada has already revealed two of those, and when it rebuilds the other two a year from now, markets may take notice of the company.
CEO Dov Sella said:
“As our ahead-of-schedule profitability and our 73% revenue growth in the first quarter of 2020 demonstrate, the potential is starting to be revealed, and I believe this is only the beginning. Our end-markets are gradually shifting to the serial production phase and we expect that in the coming months we will start to build backlog for deliveries in 2021 and beyond, especially in the US. Our US manufacturing facility is ISO-certified and deliveries to US customers have commenced.”
Liquidia Technologies (LQDA)
Liquidia Technologies recently plunged from around $11.00 after the company priced its stock at $8.00. The 9.375 million shares will provide the company with total gross proceeds of $75 million. On June 29, 2020, the company acquired RareGen LLC, a privately-held company.
Liquidia has two key products in its pipeline. LIQ861 is for pulmonary arterial hypertension. The company says “We believe LIQ861 can overcome the limitations of current inhaled therapies and has the potential to maximize the therapeutic benefits of treprostinil in treating PAH by safely delivering higher doses into the lungs.”
The other key product is LIQ865, an injectable formulation of bupivacaine for managing local post-operative pain three to five days after a procedure.
Below, LQDA stock signaled a strong “sell” after the stock peaked at around $11.44 and then promptly sold off:
Investors will want to wait for the selling pressure to ease before considering this stock.
In the current second quarter, the company should have a modest decrease in operating expenses. It incurred annual pay cycle bonuses and other expenses in the first quarter. It is also pursuing licensing opportunities that may add meaningful cash flow to the business.
Arlo Technologies (ARLO)
Arlo Technologies, which supplies internet-connected security cameras, posted strong revenue for the first quarter but issued Q2 revenue below consensus. In the first quarter, revenue grew 13% to $65.5 million. Service revenue grew at 30.7% ($14.7 million) while product revenue rose 8.8% to $50.72 million. Non-GAAP gross margin improved from 4.7% last year to 7.4%.
In Q2, Arlo forecast revenue of $50 million to $60 million. It still expects a non-GAAP EPS loss of as much as 46 cents. Blaming the pandemic, the company withdrew its full-year guidance. Despite the weak outlook, Arlo’s product usage is healthy.
For example, Arlo SmartCloud recorded over 700 hours uploaded each minute, above the 500 hours of YouTube videos uploaded per minute. On Facebook’s (NASDAQ:FB) Instagram, it recorded over 140 million videos uploaded daily.
As shown below, Arlo struggled to increase revenue from 2018. And until its operating income is positive, investors should hold only a small position in Arlo stock.
Data courtesy of Stock Rover research
Patient investors should expect paid account growth growing by at least 55% Y/Y. This will lift profit margins. Eventually, Arlo stock will bounce back as the company reaches profitability.
Ituran Location and Control (ITRN)
Ituran fell back to the $15 range since reporting first-quarter results. It earned 31 cents a share as revenue fell 7.1% Y/Y to $68.37 million. Per Wikipedia, Ituran “is an Israeli company that provides stolen vehicle recovery and tracking services, and markets GPS wireless communications products.”
Ituran scores a 92/100 on value because its price-to-sales ratio is below that of the industry and the S&P 500:
|Price / Earnings||58.3||32.2||28.2|
|Price / Sales||1.2||1.8||2.3|
|Price / Free Cash Flow||7.8||19.3||22.3|
The pandemic shook its business but co-CEO Eyal Sheratzky is optimistic about the future. The executive said, “looking a little bit further the pandemic and really further to the current situation, we believe that during 2021, the OEM will continue to grow again.”
Mexico is also set to rebound. CEO Sheratzky said “I see very positive signals that we should expect in the future…in the end, it’s a very — it’s 100% correlation to their car sales. So this is something that we depend on them.”
Sierra Wireless (SWIR)
Sierra Wireless is a wireless communications equipment supplier based in Canada. The company blamed the global automotive sector slowdown in the first quarter for hurting results and forecast a hit on revenue in the current (Q2/2020) period.
CEO Kent Thexton has a target of $200 million in annualized recurring revenue by mid-2020. By mid-2024, revenue should double to $400 million.
The market is mixed in believing Sierra Wireless can meet those lofty revenues forecast figures. After peaking over $11.00, the stock gave up gains and fell below the key 50- and 200-day moving averages. SWIR stock scores a 47/100 overall from Stockrover. For comparison, consider the scores of its peers:
The 22.7 cent loss Sierra Wireless incurred in Q1 suggests the stock will trade in a narrow range in the near-term. Investors betting on a business recovery over the next two years are relying on margin expansion from sales in the automotive segment.
At a price-to-book ratio of below one time, SWIR stock is worth taking a chance on.
Veritone is an artificial intelligence tech company. The share price surged when the stock joined the Russell 2000 and 3000 indexes on June 29, 2020.
The AI application, aiWARE, supplies machine learning solutions from audio, video, and other data sources. In the first quarter, the company lost 47 cents a share (GAAP). Revenue fell 1.9% Y/Y to $11.9 million. Investors liked the company’s discipline in controlling its expenses in the first quarter.
Veritone’s business benefited from renewal and expansion in various large contracts. For example, iHeartMedia expanded according to plan. CEO Ryan Steelberg said the “expansion is on track. It’s actually sending us up to deploy our next-generation attribute application software across their station groups.”
If the company keeps its expenses from growing and revenue grows, especially in the VeriAds business, then shares should trend higher from here. On Tipranks, five analysts recommending Veritone stock have an average price target of $16.25.
Disclosure: As of this writing, the author did not hold a position in any of the aforementioned securities.