Small-cap stocks are public companies with market capitalizations between $300 million and $2 billion. Many small-cap companies aren’t household names. In addition, the prices of small-cap growth stocks tend to be more volatile than those of larger companies.
Why should an investor pour capital into the small-cap companies when there are exciting growth stocks out there?
Well, there are several reasons why you should invest in small-cap growth stocks. Many of the world’s biggest companies, including Alphabet (NASDAQ:GOOGL), Amazon (NASDAQ:AMZN), Apple (NASDAQ:AAPL), Facebook (NASDAQ:FB) and Netflix (NASDAQ:NFLX), were at one point small-cap growth stocks.
Of course, not every small-cap company is a winner. There is a significant degree of variability in both quality and valuation. But if you get it right, then there are plenty of diamonds in the rough for you to uncover here.
During the early stages of economic growth cycles, many look towards small-cap stocks to power their portfolios to new heights. The small-cap Russell 2000 is up 18.57% this year, outpacing the large-cap S&P 500, up 17.61%. So, this is an investment area you cannot afford to ignore.
This list gives you the “tale of the tape” for seven small-cap growth stocks to buy. The list is curated to include only those stocks with positive three-year returns versus the S&P 500 Index in the last three years. And in the last five years, the EPS and top-line have increased by 12% each.
- Communities First Financial (OTCMKTS:CFST)
- Escalade (NASDAQ:ESCA)
- Sonic Automotive (NYSE:SAH)
- NASB Financial (OTCMKTS:NASB)
- Leatt Corp (OTCMKTS:LEAT)
Small-Cap Growth Stocks to Buy: Communities First Financial (CFST)
Communities First Financial is one of the best single-branch banks out there. Over the last five years, the bottom line and the top line have increased by 36.4% and 26.2%.
CFST has increased its efficiency as it has grown, and it now boasts a return on equity of 19.0% and ROIC of 13.2%. At its current price of around $43 a share, the company has a market cap of about $129.38 million.
Long-time chairman David Price formed Fresno First Bank in 2005. In 2014, the bank was restructured and is now owned by a financial holding company called Communities First Financial Corporation, which investors can buy today.
As of December 31, 2020, CFST had over $871 million in total assets, $620.8 million in loans, and $726.3 million in total deposits. In comparison, just ten years ago, the bank had under $150 million in total assets, $90.3 million in loans, and $126 million in deposits.
Like most community banks, CFST earns the majority of its revenue from regular old boring interest income. However, a large percentage of its total revenue is now coming from non-interest income. In 2020, CFST’s non-interest income stood at over $7 million.
It was close to 20% of CFST’s overall revenue, compared to approximately 11% three years ago.
Relative to the S&P 500 baseline, CFST has outperformed the S&P 500 by 208.5% and its sector by 222.5% in the past five years. Despite this excellent performance, the stock trades at just 9.8 times price-to-earnings.
As a value investor, you rarely find a gem like Evansville, Indiana-based sporting goods company Escalade.
It owns some of the leading consumer brands in archery, basketball hoops, pickleball, billiards and various other home recreational sports. Of particular interest is pickleball which is the fastest-growing sport in America. It’s a hybrid of tennis, badminton and ping-pong.
Although the nature of the sport is still obscure, one has to give credit where it’s due. Escalade had the vision to purchase Onix Sports back in 2015. Escalade avoids giving breakdowns of its various segments and sales. But it’s safe to assume Onix would trade at a rich premium to sales given the popularity of pickleball and its future growth potential.
Escalade has achieved revenue growth, gross margin expansion, and EPS growth for several quarters now. On a TTM basis, sales and EPS are up 59.1% and 233.9%, respectively. In the last five years, the top line has jumped 13.5% and the bottom line by 24.6%. Return on Equity stands at 20.7% and ROIC is at 15.6% on a TTM basis.
We often lament the stock market is trading at astronomical valuations, and all the good companies are trading at a premium. However, a branded sporting goods manufacturing company with no debt and back-to-back and impressive quarters certainly warrants attention.
Escalade is one of the rare under-the-radar small-cap growth stocks that offer a compelling story at a reasonable valuation, trading at 11.1 times P/E.
Small-Cap Growth Stocks to Buy: Sonic Automotive (SAH)
Sonic Automotive is one of the largest U.S. auto retailers. Despite the novel coronavirus pandemic pushing automotive retailers into a crisis, SAH stock did exceedingly well last year.
ESCA has outperformed the S&P 500 by 23.0% in the past year. We can see that the share price exceeded $33 pre-pandemic, plunged to $9, and then made a rapid ascent into new highs. It trades today above $26.
Sonic is a new car dealership network, but it is focusing its growth on used vehicle sales while reducing the footprint of its franchised new car dealer network. EchoPark is Sonic’s used car retail concept emphasizing a quick, easy customer experience where a lot of the pre-work is digital. The standalone used vehicle sales unit has an excellent profit contributor for Sonic in recent quarters.
Buying a used car can be a cumbersome experience. The use of digital makes the process quicker and easier. In the grand scheme of used car retailing, EchoPark is a burgeoning enterprise. Still, it is heading in the right direction, with plans to turn the segment into a “140-plus” unit juggernaut, much larger than its current, core new car dealer network.
If you agree, you get a stock trading for a cheap valuation relative to its own historical range, an extremely cheap valuation compared to the company it is trying to emulate, and a highly compelling growth story and transformation.
Small-Cap Growth Stocks to Buy: NASB Financial (NASB)
If you always on the lookout for undervalued, dividend growth stocks, then NASB Financial should be right up your alley.
The bank is right in the sweet spot of community banks, with assets under management (AUM) of between $500 million and $5 billion in assets.
Banks in this range tend to offer a full suite of financial products to their community members without getting involved in complex transactions.
NASB Financial recently reported its first-quarter earnings, and it was another strong showing. Do not expect JPMorgan Chase (NYSE:JPM) numbers from this one. What you can expect, though, is consistent growth.
Over the last three years, EPS has grown 67.8%, and sales jumped 38.3%. On a TTM basis, the top line has jumped by a whopping 75.9%.
These metrics are excellent, considering rates on single-family mortgage loans fell to historic lows. Funding costs went down, but it also meant NASB Financial could reinvest in only marginally profitable levels. Now that the economy is on the mend and interest rates are also eking up, it is the right time to invest in NASB.
Leatt Corp (LEAT)
Leatt designs and distributes personal protective equipment for various uses. If you ride motorcycles, bicycles, snowmobiles, or ATVs, chances are you have probably heard of the Leatt-Brace brand.
The company’s main claim to fame is its patented injection molded neck protection system designed to prevent injuries to the cervical spine and neck. Several other brands also use Leatt as an original equipment manufacturer for neck braces.
Last year was exceptional for the company. While most struggled to keep pace due to the pandemic, sales jumped 39.8%, and EPS is up 134.9% on a TTM basis. It was not surprising. Amid the pandemic, outdoor motorsports saw a huge boom as people turned to outdoor activity to relieve their boredom.
However, even if we take a bird’s eye view, we can clearly see that the company has been doing well for quite some time.
In the last three years alone, the bottom line and the top line jumped by 172.1% and 27.7%, respectively. On a TTM basis, the gross margin stands at 45.3%, which compares very favorably with the industry average of 18.8%. The only thing that I would
On the date of publication, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan has several years of experience analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio. Faizan does not directly own the securities mentioned above.