Markets often neglect companies that have a small capitalization or low-dollar stock price. Small-cap stocks are underfollowed and see low daily trading volume. The illiquidity can create mispricing that undervalues their worth.
A company that is a diamond in the rough needs to prove its future worth before it becomes a mainstream stock. Investors who are willing to take a risk in those unknown companies will be compensated in the long run.
However, the risk for small-cap stocks comes with a bigger downside than usual. If the company posts bad news, shareholders who sell the stock will push the stock lower. Conversely, companies on the cusp of growth will attract a following of buyers.
The seven small-cap stocks outlined here represent a variety of sectors. Most of them trade at less than $10. Unless they are included in the Russell 2000 index, they are the most under-followed companies with the biggest potential upside ahead. The companies are:
- Alto Ingredients (NASDAQ:ALTO)
- ClearSign Technologies (NASDAQ:CLIR)
- Express (NYSE:EXPR)
- Mogo (NASDAQ:MOGO)
- NextPlay Technologies (NASDAQ:NXTP)
- OMNIQ (NASDAQ:OMQS)
- ReneSola (NYSE:SOL)
The stocks have a wide scoring range on value, growth, and quality. For example, investors buying Alto or Mogo will get good value in exchange for lower current growth. ReneSola scores fairly well across quality, valuation and growth.
Alto Ingredients (ALTO)
In the basic materials industry and specialty chemicals sector, Alto Ingredients supplies essential ingredients. It has five facilities and focuses on four key markets: Health; Home and Beauty; Food and Beverage; Essential Ingredients; and, Renewable Fuels.
In the second quarter, Alto’s revenue grew by 40.6% from last year to $298.11 million. Gross profit slipped by half to $15.2 million. The profits give Alto the chance to pay off its remaining term debt in 2021. This is an inflection point. It will pursue opportunities from here and expand profitability.
Alto will enhance its service offerings and products, re-invest in its infrastructure and achieve vertical integration. In the months ahead, these initiatives will increase margins.
The ethanol business is a headwind for ATLO stock. The product is more complex to manufacture. It needs to invest more in quality assurance and get certifications. As pricing fluctuations shrink and production costs fall, Alto should report better earnings.
ClearSign Technologies (CLIR)
ClearSign offers pollution and treatment controls solutions. A few months ago, CLIR stock traded as high as $5.50 – 6.00 only to fall in a downtrend. Before the company announced bad news on Sept. 3, investors were optimistic for the certification from ExxonMobil (NYSE:XOM) for its clean energy solution.
ClearSign said that Exxon notified it of a hold on the project. CLIR stock fell by 25% that day. The company said in its press release that “the rationale for the notification was that there is now insufficient time for ExxonMobil to engineer their inclusion during the targeted 2022 refinery turnaround.”
Jim Deller, Ph.D., CEO of ClearSign, said the news is a disappointment. He believed that the company met all of the necessary qualifications. It will need to complete the final product demonstration and install the burners in Baytown.
Exxon is not its only project collaborating partner. It announced a collaboration agreement with California Boilers in February.
ClearSign may attract many bargain hunters willing to wait for Exxon to give the green light on the project. That news would send the stock higher.
Express is an apparel firm that posted strong quarterly results but the market expected more. The retailer posted net sales increasing by 86% Y/Y to $458 million. Markets may have discounted the strong Fourth of July momentum.
Perceptive investors will notice that Express posted a $238 million operating cash flow improvement from 2020 levels to $68 million. CEO Tim Baxter said, “We are on track to achieve our goal of $1.0 billion in eCommerce demand by 2024.” That would value EXPR stock at only 0.33 times price-to-sales.
Investors who believe Express.com and Express mobile app drives net sales in the next few years will want to own EXPR stock.
The downside risks include irregular quarterly earnings (slide 7, here). Express also has $267 million in inventory to work down. Another round of a retail store lockdowns due to Covid is a risk, too, albeit chances are low.
Mogo is a financial services firm based in Canada. The share price peaked at $12 earlier this year but failed in that time to break out to new highs. MOGO stock has been stuck between $5.50 – $4.50 a share for the better part of the past month.
Mogo posted a member base growth of 63% year-on-year to 1.7 million. The 29% YoY revenue growth to $13.7 million is a notable achievement. Subscription and services revenue accelerated as Mogo added multiple products on its platform. It acquired investing app Moka and before that, bought digital payments firm Carta, providing entry into the U.S. market.
Mogo raised its fourth-quarter subscription and services revenue YoY growth to 100% – 110%. This is up from 80% – 100%. For FY2022, total revenue will be 70 million CAD ($55.2 million) to 75 million CAD.
On management’s conference call, CEO Greg Feller said cross-selling Mogo products to Moka customers would begin. As it integrates the two platforms, it will support product sales through e-mail campaigns. Investors should look for average revenue per user increasing.
This will justify a higher valuation and a market cap approaching $1 billion. Fintech stocks can trade at a price-to-sales multiple of 20 times. Mogo is currently at around half that level.
NextPlay Technologies (NXTP)
NextPlay changed its name from Monaker on July 9. This change followed its acquisition of HotPlay Enterprise when it took an approximately 67% ownership of the combined entity.
HotPlay provides in-game advertising technology. From here, it plans to nurture its technology platform that includes adtech, Digital Connected TV, gaming, fintech and cryptocurrency banking services. NextPlay has its hands in many pots and is in the early phases of growth.
In May, it issued $8.1 million worth of shares, using the net proceeds to pay some of what it owes to Streeterville Capital. The stock sale also provides it capital for International Financial Enterprise Bank, which it expects to acquire to further its banking initiative. Investors should monitor NextPlay’s progress in growing the customer base and increasing assets as the fintech initiative unfolds.
Late last month it made some key management moves, appointing Andrew Greaves as COO and Tim Sikora as chief information officer. Co-CEO Bill Kerby said, “We anticipate Andrew to drive strong growth and market expansion, especially with our newly acquired divisions that include Zappware for Connected TV and HotPlay for in-game advertising.”
Omniq traded as high as $16.00 a share intraday recently when its stock up-listed to the Nasdaq Capital Market. Besides the brief blip to the upside, its Dangot Computers acquisition is a positive catalyst.
As a combined (Dangot and Omniq) entity, the firm posted revenue of $52.5 million and a gross margin of 20%. As it combines the technologies, Omniq will cross-sell Dangot solutions to its existing user base. Dangot gives Omniq exposure to the self-service kiosk market. The addressable market is $30.8 billion by 2024.
Omniq is a long way from that multi-billion revenue. System-level support is the first small step. After cross selling to customers, revenue will accelerate faster. CEO Shai Lustgarten highlighted an increasing backlog, positive developments for its artificial intelligence technology, and a pilot for AI-based solutions at airports as upcoming catalysts.
Omniq is aiming for margins in the high 30% range. To get to the 40% range, it needs to integrate its high-margin products including AI products. It is currently in the phase of introducing the product to customers. Once they sign deals, OMQS stock will respond favorably.
Senseonics Holdings (SENS)
In healthcare diagnostics and research, short-sellers are betting heavily against the stock with more than 22% short float. SENS stock could rise in value as Senseonics commercializes a long-term implantable continuous glucose monitoring system for people with diabetes.
Senseonics posted second-quarter revenue of $3.3 million. Although it lost 42 cents a share (GAAP), the most important is its $215 million of cash and cash equivalents. Revenue for the year will come in at $12 million to $15 million.
The Food and Drug Administration’s review of the PROMISE study is an upcoming catalyst. Entitled “An Evaluation of the Safety and Accuracy of the Next Generation 180-Day Long-term Implantable Eversense CGM System,” CEO Tim Goodnow expects the FDA to issue an approval by the end of the year.
Stock-based compensation hurt margins in the second quarter. But ahead of the approval, Senseonics wrote off its excess inventory and expects margins to normalize in the back half of this year.
On Wall Street, the average price target on SENS stock is $4.50, according to data compiled by TipRanks.
In the solar energy sector, ReneSola has analysts setting a buy rating and a price target of $11.90. SOL stock spent months trading in a narrow range at around $7.00 to $8.00. Investors did not react after it posted Q2 2021 results.
In the second quarter, ReneSola posted revenue of $18.5 million, down 29.3% YoY. The firm guided revenue for the year in the range of $90 million to $100 million, within the $97.64 million consensus estimates. In Q3, revenue in the range of $19 million to $21 million will trail the consensus of $26.93 million.
Given the growing hostility for Chinese stocks, ReneSola’s projects in the region may not excite investors. CEO Yumin Liu said that it plans to build 100 to 150-megawatt projects by the end of 2022. He said that China is an important market. Beijing supports the company because of its commitment to renewable energy. Margins are rising because of Notice to Proceed sales in the U.S. and Poland.
As a pure downstream player with 470 MW in the pipeline in the U.S. (out of 1,598 MW) (per slide 3, here) ReneSola is a stock to consider at current levels.
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On the date of publication, Chris Lau 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.
Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns.