Following the initial devastation of the coronavirus pandemic, the U.S. economy has so far engineered an impressive recovery. Although not every metric is perfectly aligned, we can say this much: the early (and understandable) prognostications of doom and gloom did not materialize. However, with so many unknowns heading into 2022, investors may want to adjust their capitalization strategy. Here, we’re going to discuss ideas for best small-cap stocks to buy.
Why “downsize” your investment opportunities? First of all, many people have long operated under the thesis of the small-cap effect or the tendency for smaller publicly traded companies to outperform their large-cap counterparts over time. Early this year, the Wall Street Journal provided some contextual evidence for this phenomenon, noting that the best small-cap stocks within the S&P 500 index did indeed outperform their larger rivals.
Another reason to consider downsizing is what I’d term “the George W. Bush effect of lower expectations.” Heading into his presidential debate with former Vice President Al Gore, Bush’s team attempted to raise expectations so high for Gore while downplaying them for Bush. A similar situation is going on with large caps as many want to see even more robust growth from them. That might not happen, though, boosting the best small-cap stocks.
Further, everyone that’s following the market knows that initial public offerings became, well, endemic in 2021. From traditional offerings to direct listings to special purpose acquisition companies (SPACs), we’ve seen it all and then some. However, the record year for IPOs may produce an unintended consequence. Mainstream investors are overwhelmed with flashy opportunities, while the best small-cap stocks are flying under the radar, waiting for their turn to shine.
Finally, smaller companies may be able to respond quickly and adapt to shifting market conditions. On the other hand, large-cap firms must answer to powerful stakeholders who may hinder necessary change. Therefore, as we greet the new year, don’t forget to consider these ideas for best small-cap stocks to buy.
- CommVault Systems (NASDAQ:CVLT)
- ANI Pharmaceuticals (NASDAQ:ANIP)
- Endo International (NASDAQ:ENDP)
- Ranger Oil Corp (NASDAQ:ROCC)
- Customers Bancorp (NYSE:CUBI)
- Arlo Technologies (NYSE:ARLO)
- KAR Auction Services (NYSE:KAR)
Of course, nothing in the market is without risk. While the best small-cap stocks may outperform blue chips over time, when circumstances turn volatile, smaller tends to be a liability. Primarily, this is because they lack the resources of larger enterprises. Thus, due diligence is always critical.
Best Small-Cap Stocks: CommVault Systems (CVLT)
Typically, analysts regard small caps as companies that feature a market cap between $300 million to $2 billion. In that context, I’m cheating a tad bit with CommVault Systems, which at time of writing runs a hair over $3 billion. Nevertheless, CommVault is listed on many articles of best small-cap stocks, including exchange-traded funds (ETFs) focusing on this subsegment.
But that’s not the main reason I’m including it here. Rather, the company, which specializes in data protection and data management solutions, is incredibly relevant. For instance, lost data from cyberattacks can cost enterprises millions. Further, smaller organizations that participated in last year’s grand telecommuting experiment may be at higher risk if their employees don’t practice proper security measures.
As well, even the biggest firms can suffer significant damage due to outages and other unforeseen incidents. Therefore, with so much valuable assets transmitting across digital lines, it’s more imperative than ever for corporations of any size to protect themselves. This dynamic makes CVLT one of the best small-cap stocks to buy, regardless of whatever’s lying around the corner in 2022.
ANI Pharmaceuticals (ANIP)
More of a traditional small-cap firm with a time-of-writing market value of $557.5 million, ANI Pharmaceuticals specializes in the development, manufacturing and marketing of high-quality branded and prescription generic drugs. Obviously, the pharmaceutical space enjoyed significant attention mostly due to the Covid-19 treatment and vaccination race. With much of that fervor fading, though, ANI can shine in a post-pandemic environment.
Should omicron’s higher transmissibility (but less severe symptoms) profile be indicative of the twilight of the Covid period, resources will again shift back toward non-pandemic-related healthcare needs. Further, prescription generics should play an important role in the post-pandemic era. If there’s anything that we can rely on, it’s that healthcare costs seemingly have an exclusive directional trajectory, up.
Moreover, I like companies where the insiders believe in their business, enough so that they’re buying up additional equity. No, insider buying isn’t the be-all, end-all for best small-cap stocks. However, it’s an encouraging sign that since 2020, the transactions that have occurred are buys, not sells. So, if you’re the practice-what-you-preach type, you might want to consider ANIP.
Best Small-Cap Stocks: Endo International (ENDP)
Let me caveat the idea of including Endo International on your radar of best small-cap stocks to buy with a warning: This is not going to be any easy opportunity. On a year-to-date basis, ENDP stock has shed 42%.
On the positive side, the red ink means that the market cap for Endo is $1.09 billion, which means it’s no longer on the borderline of what would be considered a small-cap firm.
But is it one of the best small-cap stocks to buy? As the top holding of the Invesco S&P SmallCap 600 Equal Weight ETF (NYSEARCA:EWSC), plenty of folks at a much higher paygrade than me certainly think so. And as I mentioned earlier with ANI Pharmaceuticals, as the Covid-19 period fades into the rearview mirror, Endo’s specialty in generics and specialty-branded pharmaceuticals should help lift ENDP stock.
But here’s something uniquely intriguing. One of Endo’s products is Testopel, a testosterone replacement therapy. According to a report published on ScienceDaily, a “study of patients hospitalized due to COVID-19 suggests that the disease might deteriorate men’s testosterone levels.”
Further, many male Covid patients reported loss of libido. Cynically, then, ENDP should rise to the occasion.
Ranger Oil Corp (ROCC)
As a recent uplisting from the over-the-counter market to the Nasdaq exchange, I consider Ranger Oil Corp a spiritual IPO. True, on paper, an IPO represents the first time a company distributes its equity shares to the public. On the other hand, an uplisting from the pink sheets to a proper exchange is more of an introduction to a wider audience.
But isn’t that one of the main points about an IPO? After all, privately held enterprises can raise funds through venture capitalists and other means. However, going public allows firms to reach the widest audience possible, netting the largest raises possible (all other things being equal). So with Ranger Oil being a Nasdaq play, I have higher expectations for it in 2022.
Still, some might question its inclusion on a list of best small-cap stocks to buy considering that the oil and gas business is losing sentiment against renewable energy firms. In recent years, renewables have become much more economically viable due to rising technology and lower costs.
However, the high energy density of fossil fuels means they could be surprisingly relevant for many, many years to come. Therefore, if you’ve got some loose change, you might want to put it to work with Ranger Oil.
Best Small-Cap Stocks: Customers Bancorp (CUBI)
Customers Bancorp is a perplexing idea among best small-cap stocks and not just because I’m again playing a little loose with the definition of small. At a few ticks under $2 billion, Customers Bancorp may be poised to enter the mid-cap range fairly soon.
And that notion isn’t out of the question. CUBI stock has been a high-flyer in 2021, gaining almost 218% since the January opener. Since I’m not the biggest fan of buying into strength after a particularly robust rally, I’m personally a bit hesitant on the opportunity.
Nevertheless, some folks might be encouraged with the outsized performance. Certainly, the company’s fundamentals justify the premium. For instance, in the first three quarters of this year, Customers Bancorp has already rung up $548.9 million on the top line, exceeding 2020’s results by 9.3%.
To be clear, 2020 wasn’t a down year for the company, which saw total revenue increase nearly 41% over 2019’s result. So, the firm is on a tear.
What’s interesting about Customers Bancorp is that one of its subsidiaries is building a cryptocurrency infrastructure to better serve its clients. That’s the kind of smart, innovative thinking that will make CUBI possibly more relevant than the competition.
Arlo Technologies (ARLO)
Another high-momentum play among the best small-cap stocks to buy, I’ll leave it to you whether you want to acquire shares of Arlo Technologies — a wireless smart home security system provider — into strength or hold out for a better price. Over the past six months, ARLO gained 31% while in the trailing month, it’s up 16.5%. Most of those gains occurred in the prior five days, up nearly 13%.
However, like other names among the best small-cap stocks, Arlo justifies its momentum through strong financial performances. During the first three quarters of this year, the company generated revenue of $292.3 million. Considering that 2020 sales amounted to $357.2 million, Arlo only needs a modest tally in the fourth quarter to beat out the prior year’s result.
Heck, a modest tally should be enough to eclipse 2019 sales, which was $370 million.
Most importantly, though, the outside fundamentals are cynically supportive of ARLO stock. For instance, we’ve been hearing news reports about San Francisco’s “brazen” property crime spree. Apparently, tolerance for such behaviors is dimming, playing into Arlo’s hands.
Best Small-Cap Stocks: KAR Auction Services (KAR)
My riskiest and most audacious name among best small-cap stocks, I’m going to urge you to perform your own due diligence with KAR Auction Services. Believe me, my feelings will not be hurt if you think this idea is garbage. As the corporate brand entails, KAR Auction provides vehicle auctions and related vehicle remarketing services. Thus, the obvious question is, why?
After all, we’ve seen an absolutely bonkers season for used car prices. Out of nowhere, buying a car — any car — during the pre-pandemic period was now a great investment. As you know, this runs counter to the common logic (actually fact) that unless you’re buying a truly distinct vehicle, mass-produced vehicles almost always lose their value.
However, as much as people would like to think that car prices are on the cusp of falling, so far, they’ve been rising. Indeed, a recent Fortune article bemoaned that rates in the secondhand market keep going higher. Surely, the madness will end in 2022?
Well, maybe not. You see, the computer chips that go into vehicles are of a cheaper, lower-margin variety. Therefore, semiconductor firms would much rather prioritize the consumer-electronics industry, which are much more lucrative.
As much as I hate to say it, KAR could very well be one of the best small-cap stocks to buy for 2022.
On the date of publication, Josh Enomoto 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.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.