The markets have a big appetite for risky investments now, thanks to the Federal Reserve. Rates were slashed to zero and the injection of around $6 trillion sent the Nasdaq to new all-time highs. After erasing losses from March 2020, the S&P 500 has completely dissociated from the real-world risks of the novel coronavirus.
Investors should consider small-cap stocks whose prospects improved recently or are about to get better. Here are 7 small-cap stocks ready to rocket up the charts:
- AMC Entertainment (NASDAQ:AMC)
- Digital Turbine (NASDAQ:APPS)
- Sonos (NASDAQ:SONO)
- SunPower (NASDAQ:SPWR)
- Waitr Holdings (NASDAQ:WTRH)
- Applied Optoelectronics (NASDAQ:AAOI)
- Arlo Technologies (NASDAQ:ARLO)
Investors who missed out on the sizzling hot FAANG stock profits may want to look at these small-cap stocks. One might erroneously assume that companies of this size will have trouble raising funds when needed or competing with larger-sized firms. But savvy investors who look deeper into a company’s prospects will fare well by investing in these picks.
AMC Entertainment (AMC)
The shutdown of movie theaters crimped AMC Entertainment’s revenue in the second quarter. Ticket sales fell 98.7% to just $18.9 million as AMC lost $5.38 a share.
On August 7, courts ruled that movie studios are allowed to own theatres again. Ahead of a potential takeover, AMC has re-shaped its business in many ways to position itself for the eventual recovery.
The company ended the quarter with $498 million in cash. AMC refinanced its debt in June, as 87% of the senior subordinated noteholders participated in the $1.46 billion exchange. As a result, net debt fell by $555 million. To further cut costs, AMC renegotiated leases at its over 900 theater locations. Landlords agreed to 75% of its leases deferred or rent abated. By running at a capex of only $26.1 million in Q2, AMC is ensuring its near-term survival.
Movie studios looking to maximize profits will want to own AMC. Direct to streaming or streaming movies 17 days after a showing in theaters have become more important revenue flows under our new socially-distanced normal. But the theater is still the biggest source of revenue. If Disney (NYSE:DIS), for example, wanted to carve out an edge over Netflix (NASDAQ:NFLX), it might buy AMC to get ahead.
A potential buyer could offer as much as double what the shares trade at currently. According to simplywall.st, AMC stock has a fair value of $15.22.
Digital Turbine (APPS)
Digital Turbine soared after reporting quarterly earnings on August 5. It posted revenue of $59 million and a GAAP net income of $9.9 million in Q1. EBITDA more than doubled to $14.1 million.
The company benefited from advertisers increasing spend on platforms that provide them with measurable results. By holding advertising suppliers accountable, customers won’t waste their limited budgets on channels that do not work. For example, Digital Turbine customers saw an increase in conversion rates. The platform benefited from increasing user engagement with applications and mobile content.
Digital Turbine forecast Q2 revenue of between $59 million and $61 million. Its non-GAAP adjusted EPS will be between 11 and 12 cents. Valuations are no longer compelling on a price-to-earnings basis. Still, APPS stock has a 96/100 quality score.
| APPS | Industry | S&P 500 | |
| Quality Score | 96 | 50 | 79 |
| Gross Margin | 38.70% | 64.30% | 28.80% |
| Operating Margin | 9.50% | 1.00% | 12.60% |
| Net Margin | 10.00% | -3.90% | 7.80% |
As shown above, net margins are above the industry and S&P 500 averages.
Sonos (SONO)
Ahead of its earnings report, Sonos peaked close to $18, but bullish sentiment reversed quickly after the company posted results after the market close on August 5. The speaker-maker lost 52 cents a share. It blamed the pandemic for closing retail stores, sending revenue 4% lower Y/Y to $249.3 million.
Sonos forecast revenue of $290 to $305 million in its fourth quarter, above the $282 million consensus estimate. In its shareholder letter, the company highlighted record direct-to-consumer revenue. And that strong momentum will continue.
Strong performance in the United States and the United Kingdom suggests that Sonos has a hot product that consumers want. New flagship soundbar Arc and the Sonos Move are higher-margin products. So the more units the company sells, the better its operating margins should get.
The average analyst consensus is a “buy,” according to StockRover:
SONO consensus is a ‘buy’ and 4 hold.
Bears are in control of SONO stock for now. Once the selling pressure ends, investors may consider re-entering a long position at a better price.
SunPower (SPWR)
SunPower posted adjusted losses for the second quarter as revenue fell by 27% Y/Y. The negative $8.8 million EBITDA may improve in the coming quarters. The company forecast non-GAAP gross margin of up to 6%, while EBITDA will be in the range of negative $38 million to negative $28 million.
The positive cash generation in Q3 is encouraging. The firm leads with Helix solar and the storage mark. For example, the attach rate for Helix storage will be over 50% in the second half of 2020. SunPower is also simplifying its structure. It is spinning off Maxeon at a valuation of over $1 billion.
SunPower itself will expand margins through Storage and Services. More importantly, it will refocus its leadership in the U.S. downstream distributed generation (DG) market. By holding SPWR stock now, investors are getting a pure-play solar power company and a global DG firm.
That being said, analysts are highly cautious about SunPower. Most analysts rate the stock as a “hold,” with an average price target of $8.39 (per Tipranks).
Waitr Holdings (WTRH)
Thanks to Uber (NYSE:UBER) buying PostMates for $2.65 billion in an all-stock transaction, Waitr Holdings stock rose sharply. And although shares dipped following second-quarter results, investors should consider adding to a position here.
Waitr reported revenue increasing modestly by 18% to $60.5 million. It earned 10 cents a share, compared to a 32 cent loss last year. Most importantly, the cash on hand of $87.3 million is despite the debt prepayment worth $10.5 million. CEO Carl Grimstad said that its pre-pandemic initiatives adapted its business to the new realities.
Specifically, CEO Grimstad said:
“Waitr continues to actively work with our local communities, diners, restaurant partners, drivers, and employees in joint efforts to mitigate risks and hardships arising from the ongoing COVID-19 pandemic.”
After trading as low as 21 cents before the pandemic, investors are paying more than 20 times more. At the higher price, investors are betting that the firm will continue to accelerate revenue while keeping sales and marketing and operations and support expenses down.
The average analyst price target is $5.70.
Applied Optoelectronics (AAOI)
Applied Optoelectronics appears to finally have turned the corner. The company reported revenue growth by 50.2% Y/Y to $65.2 million. Increased 5G mobile technology deployments are helping AOI grow again.
AOI lost $18.6 million, or 89 cents per share, in the second quarter. That’s compared to the $11.4 million, or a 57 cents a share, loss over the same quarter last year. And since non-GAAP losses will shrink to as low as a 3 cent loss a share in the third quarter, investors may want to bet on this rebound.
Seasonality suggests under-performance starting in September 2020
In the above seasonality chart, the stock is enjoying strength this summer. The stock may drop in September and October, setting up an entry point for November.
On the conference call, Executive Stefan Murry said that the company saw lots of activity in China. There are tens of millions of towers that need a fronthaul transceiver. So the total addressable market is large.
If AOI is a leading supplier in China, it might win 10% to 20% of the market share. That would squeeze out shorts, who presently have a short float of 28.2% of shares.
Arlo Technologies (ARLO)
Arlo stock has traded above $2.00 since April. But shares tripled to over $6.00 after the company posted second-quarter results. It posted a revenue decrease of 20.3% Y/Y to $66.6 million, but paid accounts rose 72% sequentially (from Q1) to 43,000.
Arlo has no debt and $205.5 million in cash. So the GAAP EPS loss of up to 41 cents in Q3 is not a concern. Chances are low that Arlo will sell shares to raise cash. If it does sell the stock, it will take advantage of the stock rally. The short float is only 5.9% of shares, so a short-squeeze lifting the stock further is unlikely.
Investors who missed the $2.00 – $3.00 entry point may want to wait for a dip before holding Arlo stock. Conservative investors should wait for another quarter of strong results to confirm the turnaround is sustainable.
Disclosure: the author owns shares of AMC Entertainment.
