Small-cap stocks have the potential to spring surprises in terms of ballistic returns in a short period. A good example is Marathon Digital (NASDAQ:MARA). In the last year, MARA stock has surged over 10,000%. The small-capitalization stock now has a market capitalization of $5.58 billion.
The opportunities are immense with the broad markets still in a bull phase. One or two stocks with multi-fold returns can change the complexion of your portfolio. It therefore makes sense to consider 10% to 20% exposure to small-cap stocks within an equity portfolio.
This column will discuss seven small-cap stocks that look good for a rally in the near-term.
Let’s take a deeper look into the following businesses.
- Electrameccanica Vehicles (NASDAQ:SOLO)
- RADA Electronic (NASDAQ:RADA)
- Golden Nugget Online Gaming (NASDAQ:GNOG)
- EHang Holdings (NASDAQ:EH)
- Tupperware Brands (NYSE:TUP)
- Borr Drilling (NYSE:BORR)
- Adecoagro (NYSE:AGRO)
Small-Cap Stocks to Buy: Electrameccanica Vehicles (SOLO)
SOLO stock is among the top names in my list of small-cap stocks. The electric vehicle company, with a differentiated product offering, is trading at a market capitalization of $562 million. SOLO stock has corrected significantly from all-time highs of $13.60 to current levels of $4.9. This might be a good level to consider exposure.
The company’s first model is a single-seat electric vehicle by the name of SOLO. The company cites the 2016 U.S. Census that concludes that 76% people travel to work in a personal vehicle. The company intends to target this market with an environment friendly offering.
Further, the company has a base selling price of $18,500. The pricing is likely to attract consumers. With the company expanding its retail presence in the United States, the coming quarters are likely to keep the markets interested in the stock.
A good initial response can take SOLO higher. With an asset-light model, the company does not have any significant investment requirement in the foreseeable future. Electrameccanica is also setting-up an assembling unit in the United States, which will be capable of producing up to 20,000 SOLOs per year.
RADA Electronic (RADA)
RADA stock is another attractive small-cap from the defense industry. The stock has surged by 240% in the last year. However, there seems to be potential for further upside from current levels.
Rada Electronic is focused on the tactical radar market, which has a potential market size of $5 billion. In addition, the company is a provider of advanced airborne digital video and data recorders.
Last year, the company reported revenue growth of 105% and for the current year, top-line growth is guided at over 70%. Therefore, the company is on a high growth trajectory and the stock looks attractive.
It’s also worth noting that for FY2020, the company received total orders worth $102 million. Further, for the first two months of the year, the order intake has been $15 million. For the comparable period, order intake is higher by 150%. As order intake accelerates, the company is positioned for strong growth.
In March 2021, the company also raised $59.5 million from a public offering. This provides the company with ample financial flexibility to pursue aggressive growth.
Overall, RADA stock seems to be a dark-horse among small-cap stocks. I would not be surprised if the stock doubles from current levels.
Golden Nugget Online Gaming (GNOG)
GNOG stock has been in a downtrend after touching highs of $27.18. Currently, the stock trades at $15.14.
As an overview, Golden Nugget is in the business of online gambling, which has an expanding presence in the United States. For FY2020, the company reported revenue of $91.1 million and an adjusted EBITDA of $28.9 million.
For the current year, the company has guided for revenue in the range of $130 million to $145 million. As iGaming is legalized in more states, the company has a big opportunity for growth in the coming years.
Sustained growth in average revenue per user has also contributed to expanding margins. As strong top-line growth sustains, the company is well positioned to deliver healthy cash flows.
According to the company, the U.S. iGaming market is expected to be around $30 billion to $37 billion at maturity. The iGaming market is likely to be bigger than the sport betting market. Therefore, the current market is just the tip of the iceberg and Golden Nugget seems well-positioned to benefit from industry tailwinds.
Overall, GNOG stock seems to be among the top small-cap stocks to consider at current levels.
EHang Holdings (EH)
EH stock has witnessed significant volatility in the last one-year. The stock surged to a high of $129.80 before plunging to current levels of $35.31. The selling seems to be overdone and EH stock looks attractive.
One reason for the stock plunge was a report from Wolfpack Research that alleges that the company is an “elaborate stock promotion.” However, EHang has refuted the report and the stock has been consolidating around $35 levels.
It’s worth noting that in January 2021, the company received a $40 million investment from Carmignac, a leading European asset management firm. This investment lends credibility to the company’s business.
From a business development perspective, the company has a potential first-mover advantage in the passenger aerial vehicles. In addition, the company is also making inroads in the segments of aerial logistics, firefighting and ambulances. Therefore, there is a big addressable market, and top-line growth is likely to be strong in the coming years.
For Q3 2020, the company reported revenue growth of 104.3% on a year-on-year basis to 71 million RMB. Gross margin was also healthy at 59.2%. Once sales growth gains further traction (after the launch of passenger aerial vehicles), the company is positioned to achieve operating level profitability. This is possibly an upside trigger for EH stock.
Tupperware Brands (TUP)
TUP stock seems to be among the hottest small-cap stocks with an upside of over 1,700% in the last year. The company’s turnaround has been significant, and as recovery sustains, TUP stock looks good for further upside.
To put things into perspective, the stock is currently trading at a forward price-to-earnings-ratio of 7.65. Therefore, if recovery sustains in terms of revenue growth, margin expansion and free cash flow upside, the stock can double from current levels.
With a company staging a turnaround from near-bankruptcy, it’s important to look at the credit metrics. As of December 2020, the company’s debt-to-adjusted-EBITDA was 2.99, which is well within the allowed covenant of 4.50.
Further, in FY2020, the company reported free cash flow of $197.6 million. With FCF expected at around $200 million for the year, the company is positioned for de-leveraging.
In terms of top line, the company reported revenue growth of 14% in Q3 2020 and 17% in Q4 2020. The second half of the year signaled a turnaround for Tupperware and the company expects the positive momentum to sustain.
Overall, TUP stock has corrected from recent highs of $38.59 to current levels of $26.38. The stock seems positioned for renewed upside.
Borr Drilling (BORR)
With Brent trading above $62 per barrel, the oil and gas sector has seen renewed buying interest. BORR stock is worth considering among small-cap stocks in the energy sector.
Borr Drilling operates jack-up rigs in the offshore drilling sector. Last year, the company raised $57.5 million in total proceeds from equity offerings. Further, $40 million of liquidity was raised in January 2021. With the capital raise, the company expects to achieve $1 billion in accumulated liquidity improvement through 2023.
It’s also worth noting that the offshore industry is at an early stage of recovery. My view is backed by the fact that from October 2020 to February 2021, the company has secured eight new contracts or contract extensions.
In the past year, BORR rose by 29%. As new contracts couple with possibly increase in day-rate, the stock looks positioned to trend higher. Additionally, if day-rates improve, EBITDA margin expansion is likely.
Another point worth mentioning is that the company has modern jack-up rigs that have witnessed higher demand as compared to standard rigs. Industry recovery will therefore position the company well for higher capacity utilization.
AGRO stock has been in an uptrend, up over 110% in the past year. This agricultural commodities name is worth adding to a portfolio of small-cap stocks.
An important point to note is that inflation is expected to accelerate in the coming quarters. This would imply higher energy, industrial commodity and agricultural commodity prices. As a matter of fact, ethanol, sugar, corn and soy prices have hit a multi-year high. Adecoagro is well positioned to benefit from this.
Adecoagro also commenced a five-year investment cycle in FY2017. Currently, the company is at the final stages of the investment plan. Therefore, the company’s operating cash flow is positioned to be strong as agricultural commodity prices trend higher. At the same time, free cash flow is likely to accelerate as investments decline. This makes AGRO stock attractive.
It’s also worth mentioning that as of September 2020, the company’s farmland valuation was $763 million. The stock currently trades at a market capitalization of $954 million. Considering that FCF is likely to accelerate, the stock looks undervalued, even after a strong rally in the recent past.
On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.