If you’re looking to bet on micro-cap stocks for the long haul, one option is to buy the actively-managed AdvisorShares Dorsey Wright Micro-Cap ETF (NASDAQ:DWMC). Another is to pick from among the ETF’s 151 holdings.
DWMC starts with an investment universe of approximately 2,000 U.S. stocks, most of which are micro caps. Portfolio manager Dorsey Wright has his own proprietary systematic process for culling the herd, reducing the portfolio to a manageable number of stocks around 150, selected based on relative strength rankings and equal-weighted on a modified basis.
Here are 7 micro-cap stocks to buy for the next 10 years:
- Celsius Holdings (NASDAQ:CELH)
- Five9 (NASDAQ:FIVN)
- Goosehead Insurance (NASDAQ:GSHD)
- Utz Brands (NYSE:UTZ)
- Hamilton Lane (NASDAQ:HLNE)
- Travelcenters of America (NASDAQ:TA)
- Hamilton Beach Brands (NYSE:HBB)
Dorsey Wright utilizes a buy/sell process that eliminates any emotional guesswork and is based on a disciplined investing approach. It’s important to keep in mind that DWMC has only been around since July 2018. It hasn’t built a track record. That said, it’s worth keeping on your watch list.
Micro-Cap Stocks to Buy: Celsius Holdings (CELH)
Before you consider shares of Celsius Holdings, a maker of fitness-focused beverages, it’s important to understand that this stock has been on a tear in 2020, up 562% year to date through November 13.
At some point, this stock has to take a breather. When it does, you’ll want to pounce on its shares anywhere in the mid-to-high $20s.
The company reported excellent third-quarter results on November 12, with sales up 80% year-over-year to $36.8 million — 60% growth in North America (73% of sales) and 172% growth internationally (27% of sales) — plus 165% growth in its adjusted EBITDA to $6.9 million.
In terms of gross margins, they increased by 420 basis points in Q3 2020 to 45.8%. By comparison, Coca-Cola’s (NYSE:KO) is approximately 60%.
Some might consider this a weakness, but given its market capitalization is about 1% of Coke’s, I see gross margins continuing to grow as the company gains scale in the U.S. and elsewhere.
The company continues to transition from a wholesale distribution model to direct sales. In its Q3 press release, it said the number of stores transitioned to direct-sales-distribution (DSD) in New York City had more than doubled.
Look for CELH stock to double in 2021.
Five9 (FIVN)
These days it seems the only thing you have to do is have “X-as-a-service” in your product offering and your shareholders will be richly rewarded. That’s certainly the case with Five9, whose shares are up 122% year to date and 92% on an annualized basis over the past five years.
Seriously though, Five9’s cloud-based call center software platform addresses a pressing need in a very large market. Estimates say U.S. companies spend $230 billion on contact centers each year. And yet customers continue to receive poor service.
Five9’s platform helps companies provide the kind of service customers want, where they want it, improving engagement scores with consumers and increasing sales.
At the moment, Five9 is focused on the contact center software market, which is estimated to be $24 billion annually. It’s currently reached about 15% of this market, so there are many opportunities to grow the business.
Between Q2 2014 and Q3 2019, it has increased the number of customers that spend more than $1 million annually from three to 49, and annual recurring revenue (ARR) from $6 million to $88 million.
It isn’t hard to see why it’s done so well over the past five years.
Remember that Five9 isn’t a micro-cap by definition — market caps of less than $300 million and more than $50 million — but it has an excellent business model, which is why DWMC continues to invest.
Goosehead Insurance (GSHD)
Like Five9, this company’s market cap of $4.5 billion is significantly higher than the traditional micro-cap definition. Nonetheless, it’s among DWMC’s top 10 holdings.
In August, I recommended investors buy this Texas-based independent personal and commercial lines insurance agency. It provides homeowners and auto insurance for personal lines, general liability, property and auto insurance on the commercial side, and life insurance for both market segments.
In the first nine months of 2020, Goosehead’s revenues grew almost 30% to $82.4 million, with adjusted earnings per share of $0.48, 45% higher than a year earlier.
Founded in 2003, Goosehead focuses on a three-pronged approach to selling insurance:
- 1) The company provides customers with over 100 insurance companies to choose from;
- 2) It separates the sales function from the service function so that customers get best-in-class service; and
- 3) It uses proprietary technology to help sales and service personnel better serve clients.
It might not be glamorous, but it works.
Utz Brands (UTZ)
Collier Creek Holdings was a special purpose acquisition company that raised $400 million in October 2018 to combine with a consumer goods industry target. On Aug. 28, 2020, it completed its merger with Utz Quality Foods to form Utz Brands.
Utz Brands owns several different snack brands, including Utz, Zapp’s, Golden Flake, Boiler Canyon, and Hawaiian Brand. It operates 14 facilities in eight different states, including Pennsylvania, where it’s located.
The company was founded in 1921 by Bill and Salle Utz in Hanover, Pennsylvania. Over the past decade, acquisitions have driven its growth, both geographically and by brand. Before merging with Collier Creek, this was the largest privately-held branded producer of salty snacks in the U.S.
In terms of salty snack sales, Utz had $972 million in revenue in 2019, giving it a 7% market share in the U.S. Especially strong in potato chips and pretzels, with 12% and 17% of their respective markets, the company continues to grow.
On November 12, Utz announced the acquisition of ON THE BORDER tortilla chips for $480 million. If you include potential synergies from the acquisition, Utz paid 8.4 times adjusted earnings before interest, taxes, depreciation and amortization.
ON THE BORDER is the #3 tortilla chip brand in the U.S. Utz expects 2020 sales of $195 million, 32% higher than a year earlier.
This could be the next Frito-Lay.
Hamilton Lane (HLNE)
Investors who bought shares in Hamilton Lane — an alternative investment manager providing clients with investments in the private capital markets — during the correction in March are sitting on more than 100% returns.
Over the past couple of years, I’ve been fascinated by private capital markets and equity crowdfunding, so I’m quite excited to recommend investors buy small piece of Hamilton Lane, which has $73 billion in assets under management and $39 billion in fee-earning assets.
Yielding an attractive 1.7%, shareholders who bought HLNE stock atn the company’s February 2017 initial public offering are sitting on compounded annual growth (CAGR) of 51.3%.
For the six months ended Sept. 30, 2020, Hamilton Lane’s management and advisory fees increased by 12% over last year to $133.6 million. Since 2005, the company has grown its assets under management and advisement by an annually compounded 19%.
Over the past five years, Hamilton Lane’s revenues grew by 55% to $224.9 million in 2019 from $157.6 million in 2016. On the bottom line, pre-tax income has grown 148% from $56.7 million in 2016 to $140.7 million in 2019.
On October 28, Hamilton Lane announced the opening of a Singapore office, its fifth office in the Asia/Pacific region. Other offices in Asia include Hong Kong, Seoul, Sydney, and Tokyo.
Travelcenters of America (TA)
Many years ago, I drove from my home in Toronto across the U.S. to Seattle. Petro Stopping Centers was a safe place to stop for a bite to eat in the middle of the night. Owned by Travelcenters of America, the company’s stock has had a checkered past.
A $10,000 investment in TA stock a decade ago today is worth $18,215, about half the $36,491 you’d have if you invested in the broader U.S. markets over the same period. However, if you invested in its stock a year ago, you’re up almost 209%.
What’s changed?
In December 2019, TA Travelcenters hired a turnaround specialist to fix what ails it. CEO Jonathan Pertchik has worked with several private equity firms to turn around their portfolio companies. Previous jobs include CEO of Intown Suites and ST Residential. In December, Pertchik had this to say:
“I am looking forward to applying established transformative practices from my prior turnaround experience to increase cash flows and margins and create a more efficient organization. TA is an impressive company with a long history of successfully serving both professional drivers and highway motorists, and I am excited to build upon this great company’s unique position in the marketplace.”
In the third quarter ended Sep. 30, 2020, the company reported an adjusted net income of $9.2 million, up considerably from $1.9 million a year earlier.
On the top line, it plans to convert 94 of its Iron Skillet and Country Pride restaurant concepts to IHOP locations over the next five years. Pertchick continues to look at any opportunities to grow sales while increasing its operational efficiencies.
Hamilton Beach Brands (HBB)
Hamilton Beach is a name anyone who spends time in the kitchen will be familiar with. It makes virtually any gadget you might use to prepare meals, including coffee makers, blenders, food processors and the like.
This company has a fascinating history dating back to 1904. It was recently owned by Nacco Industries (NYSE:NC) until it was spun-off in September 2017. Holders of Nacco stock got one share of HBB for every share held in the parent.
The spinoff hasn’t worked out too well for Nacco shareholders. Trading around $62 at the split, the two shares are worth approximately $40 combined three years later.
Although the company’s third-quarter results weren’t good — sales fell 26% and it lost $2 million — it expects pent up demand due to Covid-19 will deliver stronger sales in the final quarter of the fiscal year.
“Based on its current outlook, the Company expects total revenue for the second half of 2020 to be in line with last year’s second half and operating profit to increase approximately 20%,” the company stated in its Q3 2020 press release.
Trading at 0.44 times sales, HBB is definitely the value play of these seven micro- and small-cap stocks.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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.
