Irrespective of market conditions and valuations, there are small companies that dare to think big. These emerging stars could be mid-caps or large-caps in the years to come. No doubt, established companies can provide you with stability and lower portfolio risk. But it’s the small-cap stocks that are the game-changers in terms of returns.
Personally, I have a relatively aggressive investment style. Therefore, I’m not hesitant to invest nearly 30% to 40% of my funds in small-cap stocks. However, even for a conservative portfolio, it still makes sense to have at least 15% to 20% exposure to small caps.
As such, this column will discuss seven small-cap stocks that are worth holding for the next five years. I believe that these companies have sound business models. Additionally, industry tailwinds will likely support their growth.
So, let’s look at the reasons why these small-cap stocks are worth a look.
- Rada Electronic (NASDAQ:RADA)
- Lithium Americas (NYSE:LAC)
- Blink Charging (NASDAQ:BLNK)
- Costamare (NYSE:CMRE)
- Appharvest (NASDAQ:APPH)
- Carparts.com (NASDAQ:PRTS)
- Sundial Growers (NASDAQ:SNDL)
7 Small-Cap Stocks to Hold: Rada Electronic (RADA)
I believe that RADA stock is one of the small-cap stocks that has potential to be a five-bagger in the next five years. This stock has been in consolidation mode in the recent past. Now, a breakout on the upside seems imminent.
To be sure, Rada Electronic is in the business of selling tactical radars for the defense and aerospace industry. The company’s growth has accelerated lately and it seems like that strong growth will likely sustain.
This company believes that the market for tactical radars is worth $6 billion (Page 15). This provides ample scope for revenue upside. For the last two years, the company reported revenue growth of 125% in 2019 and 105% in 2020. Now for the current year, Rada expects revenue growth of 70% to over $120 million. Clearly, if this growth momentum sustains, RADA stock is positioned for meaningful upside.
It’s also worth noting that, for the first half of the year, the company received new orders worth $56 million. Order intake increased by 37% on a year-over-year (YOY) basis. As that backlog swells, the company is well positioned.
Finally, though, Rada has partnered with BeyondMinds to develop advanced AI solutions for tactical radars. Naturally, an innovative edge will also help ensure it stays ahead of the curve and captures a bigger market share.
Overall, Rada has witnessed strong growth coupled with EBITDA margin expansion. The company has also raised funds recently. With robust financial flexibility and its acceleration in order intake, the outlook is bright for this small-cap stock.
Lithium Americas (LAC)
It seems very likely that the next decade belongs to electric vehicles (EVs). And if this view holds true? Well, LAC stock will definitely be worth holding in your portfolio for the next five years.
For one, it’s expected that global lithium demand will “more than double by 2024” on EV growth. Of course, this positions lithium miners for sustained growth in the coming years.
Specific to Lithium Americas, the Thacker Pass is also likely to be a game-changer. Basically, the company is developing the largest known lithium resource in the United States. Just to put things into perspective, the two-phase project is likely to have 60,000 tpa (tonnes per annum) of battery-grade lithium carbonate. Further, the mine life is expected to be 46 years.
Additionally, this company’s Cauchari-Olaroz project in Argentina is expected to commence production in 2022. The annual production capacity will be 40,000 tpa. The project is also expected to deliver an annual EBITDA of $308 million.
Clearly, with these projects in its pipeline, LAC stock looks attractive. After a big rally, the stock has been in a consolidation mode for the last few months. This presents a good accumulation opportunity.
Finally, it’s also worth noting that the company has some $500 million in cash. Additionally, the two major projects are fully funded from credit facilities. Therefore, I don’t see any financial constraints here. Overall, as demand for lithium sustains, this pick of the small-cap stocks is positioned to deliver healthy EBITDA and cash flows for the coming years.
7 Small-Cap Stocks to Hold: Blink Charging (BLNK)
From a valuation perspective, investors might believe that BLNK stock needs to correct further. However, it’s worth noting that the stock has remained resilient around the $30 to $40 level. Now with a high short interest, BLNK seems positioned for a short-squeeze rally in the near-term.
Of course, in terms of industry fundamentals, the rapid adoption of electric vehicles is also impossible without a proper charging infrastructure. The EV charging market was valued at $5.03 billion in 2020. But that market size is expected to increase to $36.87 billion by 2026. This explains why many investors remain bullish on Blink Charging.
While valuations look stretched, growth can be potentially explosive in the next five years. Currently, Blink has 7,000 commercial and 10,300 residential EV charging stations deployed (Page 4). With market presence in the U.S. and Europe, aggressive growth is likely. The company has also pursued acquisitions, which will allow its entry into new markets.
At the same time, Blink has also been developing new products and diversifying its revenue stream. Currently, revenue is derived from energy sales, network management services, energy services and advertising.
Overall, this company’s revenue growth has been stellar. With innovation and presence in big markets, BLNK stock is certainly one of the small-cap stocks worth holding for the next five years.
Right now, CMRE stock looks like a screaming buy at a forward price-to-earnings (P/E) ratio of 5.33. Additionally, the stock has a current dividend yield of 3.92%. Like others on this list, this small-cap containership company is worth holding for stock upside as well as those healthy dividends. The industry outlook for containerships also looks stable for the coming years as global growth gains traction.
In recent news, Costamare also announced the acquisition of 16 dry bulk vessels. Two of these vessels have been delivered and the remaining containerships are expected to be delivered by January 2022. This acquisition provides visibility for revenue upside in the coming quarters.
Another important point to note here is that the company has an order backlog of $3 billion as of June 2021 (Page 12). The containerships have a remaining charter duration of 4.2 years. This provides clear revenue and cash flow visibility.
Finally, from a financial perspective, the company reported adjusted EBITDA of $323 million for the last 12 months. Debt servicing is therefore not a concern. Plus, with clear revenue visibility and improvement in charter rates, the financial profile here will likely remain strong.
These factors make this pick of the small-cap stocks attractive at current valuations. Once new containerships provide Costamare with cash flow upside, CMRE stock will likely trend higher.
7 Small-Cap Stocks to Hold: Appharvest (APPH)
APPH stock is another name among small-cap stocks that could be a potential multi-bagger in the next five years. As an overview, the company is in the business of vertical farming, which could be a $7.3 billion market by 2025. As an early mover, Appharvest is positioned to be among the industry leaders.
In fact, Appharvest already has a 60-acre fully planted facility in the United States. Moreover, this facility had 3.8 million pounds of tomatoes sold in the first quarter of 2021, which helped translate into net sales of $2.3 million. For the full year, the company is now guiding for sales of $20 million to $25 million.
Importantly, Appharvest has also guided for the construction of 12 facilities by 2025 (Page 8). Therefore, revenue growth is likely to be robust in the next few years. With significantly less water utilization and chemical pesticide free products, the business will probably also accelerate well beyond 2025.
Finally, it’s also worth noting that Appharvest has entered into a distribution agreement with Mastronardi. The latter is one of the largest distributors in North America. This agreement will allow APPH to sell its end products effectively as production ramps up in more facilities.
PRTS stock is another interesting name that’s worth holding in a portfolio of small-cap stocks. So far, this stock has moved higher by about 50% year-to-date (YTD). However, it seems that its uptrend will sustain alongside PRTS’ healthy business growth.
For Q1 2021, this company reported sales growth of 65% to $144.8 million. For the same period, the company’s adjusted EBITDA was $3.6 million. Carparts.com has also reaffirmed its long-term sales growth target of 20% to 25%. If this range of annual growth is achieved over the next five years, the stock is bound to remain in an uptrend.
To put things into perspective, Carparts believes that the total addressable market (TAM) for auto parts is $314 billion. And, with the auto-parts industry having an online penetration of just 5%, there is still big opportunity for growth that’s specific to PRTS’ business model.
Another important point to note here is that the company has several in-house brands for auto parts. So, as sales from in-house brands increase, EBITDA margin expansion is likely. For 2020, the company achieved an EBITDA margin of 3.6%. Over the long term, though, the target EBITDA margin is in the range of 8% to 10%. Clearly then, with strong top-line growth and imminent EBITDA margin expansion, PRTS stock is attractive.
7 Small-Cap Stocks to Hold: Sundial Growers (SNDL)
Last up on this list of small-cap stocks is a pot play called Sundial Growers. Right now, the cannabis industry seems to be at an inflection point and SNDL stock is among the more attractive small-cap penny stocks that are worth considering on positive industry tailwinds.
Currently at 89 cents, this stock looks attractive in terms of price, with the company positioning for strong growth in the coming years. Personally, I would not be surprised if SNDL stock delivers five-times or even 10-times returns over the next five years.
In the last few quarters, Sundial was focused on raising funds and strengthening its balance sheet. Now with over $870 million in cash and equivalents, however, the focus has since shifted to organic growth as well as acquisition-driven growth.
To be sure, Sundial already has a portfolio of in-house brands with a focus on inhalables. So, the company has been ramping up marketing efforts for branded cannabis. This will likely translate into revenue growth and EBITDA margin expansion.
Plus, SNDL has also formed a joint venture (JV) with Saf Group. The company has already committed $188 million towards the JV. The partnership will be investing in debt, equity and hybrid cannabis investments globally.
All told, Sundial is likely to have an attractive investment portfolio in the next 12 to 24 months. This will ensure stable cash flow visibility and cash upside from in-house brand growth. And, besides the business growth factor, SNDL stock will also likely surge higher once cannabis is legalized at the federal level in the United States.
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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. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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.