In a stock portfolio, large companies in mature industries provide steady cash flows. With a low beta, these companies also help in creation of a defensive portfolio.
However, the objective of creating a diversified portfolio is to beat the index returns. It makes sense to invest in the index if investors can’t beat the index.
It is likely to be a difficult task to beat the index without having medium and small size companies in the portfolio. Micro-cap stocks can be potential multi-baggers. Identifying promising companies at an early stage of growth is therefore a key factor in delivering healthy portfolio returns.
This column will discuss three micro-cap stocks that are worth holding for the long term. Let’s have a deeper look into these lesser-known stocks.
- Fly Leasing Limited (NYSE:FLY)
- China Distance Education Holdings (NYSE:DL)
- Dynagas LNG Partners LP (NYSE:DLNG)
3 Micro-Cap Stocks: Fly Leasing Limited (FLY)
FLY stock, which currently trades at a market capitalization of $207 million, is an attractive micro-cap stock to consider. As an overview, Fly Leasing is a global aircraft leasing company with a fleet of 84 aircraft as of first quarter of 2020.
The novel coronavirus pandemic has impacted FLY stock since the airline industry has been severely hit. However, its worth noting that the company has an average lease term of 5.2 years. This provides clear cash flow visibility to the company.
Another important factor to note is that the aircraft fleet is leased to 40 airlines in 24 countries. This provides revenue diversification and reduces cash flow visibility risk.
From a financial perspective, Fly Leasing reported cash and equivalents of $361 million as of Q1 2020. For the same period, the company’s unencumbered assets were $560 million. This provides headroom for leveraging. Furthermore, a lease term of 5.2 years ensures smooth debt servicing.
Therefore, the panic driven sell-off in the stock post the pandemic is a good opportunity to accumulate for the long term.
China Distance Education Holdings (DL)
DL stock, which has moved higher by 77% in the last one year, is another name among micro-cap stocks worth holding.
The company is a provider of online education and value-added services to professionals and corporate clients in China.
I believe that this segment will gain traction in the coming quarters due to the novel coronavirus pandemic. Companies will prefer online training for employees and China Distance Education stands to gain. My point is underscored by the fact that the company’s paid enrollments doubled in the second quarter of 2020 on a year-on-year basis.
Another factor that makes DL stock interesting is the company’s steady improvement in operating margins. The most recent quarter was the fourth consecutive quarter of margin improvement on a YoY basis. As the business grows along with margin expansion, there is ample room for shareholder value creation.
Even with the positive developments, the current year growth will be impacted due to postponement of professional exams, among others. However, analyst estimates suggest that earnings growth for the company is likely to average 15% annually over the next five years. This makes DL stock attractive with a medium to long-term investment horizon.
Dynagas LNG Partners LP (DLNG)
Dynagas LNG is another attractive name worth considering. The partnership unit has surged by 137% in the last one year and I believe that there is more juice in the rally.
Looking at the positives, Dynagas LNG has a fleet of six LNG carriers. These carriers have an order backlog of $1.2 billion with a remaining charter duration of 8.3 years. Furthermore, the charters are with strong counterparties. This includes the likes of Total (NYSE:TOT) and Equinor ASA (NYSE:EQNR), among others. With long-term charters, there is clear revenue and cash flow visibility.
From a financial perspective, the company reported net debt to capitalization of 60% as of March 2020. With an extended debt maturity profile, there is no refinancing pressure in the near term.
It’s also worth noting that the partnership unit has been gradually deleveraging. The objective is to seek further growth opportunities with ample financial headroom. As the number of LNG carriers increase in the coming years, cash flows will also increase. This will take DLNG stock higher.
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.