- Acacia Research (ACTG): Cash-rich, and trading at a discount to book value, it’s at work monetizing its tax-loss carryforwards.
- ARC Document Solutions (ARC): Even as it has jumped in price, this printing company may have more room to run.
- Century Casinos (CNTY): Success with a recent purchase could move the needle for this regional casino operator.
- Chicken Soup for the Soul Entertainment (CSSE): Streaming play that could recover strongly if operating results improve.
- 1847 Goedeker (GOED): Disappointment is more than priced-in with this online appliance retailer.
- Hudson Technologies (HDSN): Up big in the past year, but still cheap at today’s prices.
- Pure Cycle (PCYO): An asset-rich company at work realizing its underlying value.
Micro-cap stocks can be a great area to invest if you are an individual investor. Defined as stocks with a market capitalization of $300 million or less, this is an area typically too small for the “smart money” (institutional investors) to put their money to work. In turn, it makes for a far less efficient market than seen with larger equities.
Also, smaller companies have greater growth potential. There are fewer hurdles in growing a $100 million business into a $1 billion than there are scaling a billion-dollar business into a $10 billion one.
Having said all this, there are some downsides. Micro-caps have a greater degree of risk. Liquidity can also be an issue.
Still, if you’re on the prowl for high-risk, high-potential return plays, micro-cap stocks can offer such opportunities. Not sure where to start? Consider taking a closer look at these seven small-sized names, across a variety of industries.
|ACTG||Acacia Research Corp||$4.47|
|ARC||ARC Document Solutions||$3.90|
|CSSE||Chicken Soup for the Soul Entertainment||$8.17|
|PCYO||Pure Cycle Corporation||$12.12|
Micro-Cap Stocks: Acacia Research (ACTG)
Earlier this year, I discussed Acacia Research (NASDAQ:ACTG). Its controlling shareholder, Starboard Value, is looking to monetize its U.S. federal tax-loss carryforwards (totaling $172.2 million) by buying/turning around undervalued companies.
Recently, this has included an attempt to buy Kohls (NYSE:KSS). However, as other bidders have emerged, it may not longer be in the running to buy the department store chain. Nevertheless, with around $309 million in cash and around $361.8 million in equity securities, this micro-cap company (with a $204.5 million market capitalization) has plenty of cash to perhaps pursue smaller, but more lucrative mergers and acquisitions.
That’s not all. It’s generating positive cash flow from its portfolio of patent assets. Also, trading well-below book value, the company is taking advantage of this fact by buying back shares. In short, plenty of things are in play to help ACTG stock move to higher prices.
ARC Document Solutions (ARC)
Take a look at a chart for ARC Document Solutions (NYSE:ARC), and you may think it’s too late to buy. After all, it’s up more than 75% over the past year. Yet while it’s experienced a big jump in price since 2021, that doesn’t mean shares in this printing and document services company have become too expensive.
That is, on an enterprise value/EBITDA (EV/EBITDA) basis, ARC remains cheap. Its current EBITDA multiple is 5.9x. Furthermore, as its business continues to recover from the pandemic, it could see its profitability improve further over the next few years.
Admittedly, its high exposure to the construction industry may be a risk. The fallout from rising interest rates could affect its continued recovery. But with its low valuation accounting for much of this risk, you may want to add ARC stock (which by the way has a forward dividend yield of 2.8%) to your watchlist.
Century Casinos (CNTY)
While just outside micro-cap territory ($334.2 million market cap), Century Casinos (NASDAQ:CNTY) is worth noting. Mainly, due to its low valuation (EBITDA multiple of 7.6x) compared to other casino stocks. Comparable names, for example, Full House Resorts (NASDAQ:FLL), trade for much higher multiples (12.1x).
Now, unlike its better-known peers, Century has far less exposure to the i-gaming/online sports betting trend. That’s part of the reason why it trades at such a low valuation. This, though, may be more than made up for by its strategy of buying regional casinos and maximizing their profitability.
Most recently, this has included its purchase of the Nugget Casino Resort outside Reno, Nevada. Getting its operations, and 50% ownership of its real estate at a reasonable price multiple, success improving the profitability of this property could go a long way to driving CNTY stock to higher prices.
Micro-Cap Stocks: Chicken Soup for the Soul Entertainment (CSSE)
Chicken Soup for the Soul Entertainment (NASDAQ:CSSE) is a name I recently said would make a great acquisition target for AMC Entertainment (NYSE:AMC). But profits with this stock down the road don’t hinge completely on getting taken out by an acquirer.
Instead, shares in this content streaming company could make a recovery on their own. Down massively over the past year, a partial recovery could result in tremendous gains. So, how could it make a comeback? By continuing to scale up its content streaming platforms. These include its eponymous platform, plus other well-known platforms such as Crackle.
Bulking up its content library, it may be on its way to becoming profitable. Even as it is a small player in a highly competitive space. Granted, there’s a degree of uncertainty as to whether its operating results improve. However, with this high uncertainty priced-in, stronger-than-expected results could mean a big rebound for CSSE stock.
1847 Goedeker (GOED)
1847 Goedeker (NYSEAMERICAN:GOED) is one of the micro-cap stocks that made very wild moves during 2021. Yet as meme mania has calmed down, shares in this e-commerce retailer of appliances have instead seen a sharp drop in price.
Why has it dropped so much? Chalk it up to concerns that an economic slowdown will affect its future results. Specifically, prevent it from seeing a big jump in profitability, stemming from consolidating Appliances Connection (which it bought last year) into its existing operations.
Investors who placed their bets early on this deal playing off have been burned. New investors, however, could have the ability to get in at a price where risk/return is firmly in their favor. Trading near its 52-week low, the market has priced in bad news before it even arrives. If an economic slowdown is less severe than expected, GOED stock could come back in a big way.
Hudson Technologies (HDSN)
Hudson Technologies (NASDAQ:HDSN) is another of the micro-cap stocks that shot up while the market has moved down. In the past year, it’s up more than 258%. Year-to-date alone, it’s up more than 59%.
But despite this massive run-up, HDSN stock remains cheap. At today’s prices, it trades for just 9x earnings. Per analyst estimates, this provider of cooling systems is expected to report similar earnings results this year and the next. As Louis Navellier has argued, the company has a climate change catalyst to boot.
Following its big jump in price, future gains may be more modest. Or will they? Right now, the stock trades at a low valuation, as there’s skepticism whether it can produce results in 2022 and 2023 similar to that of 2021. If it achieves this, the market may reward it with a much higher earnings multiple than it commands today.
Micro-Cap Stocks: Pure Cycle (PCYO)
On a screener, Pure Cycle (NASDAQ:PCYO) may look expensive. It trades for around 58.5x earnings. Yet this land and water resource company has a lot of hidden value. At least, that’s the view of one Seeking Alpha commentator, who broke down the situation earlier this month.
Put simply, Pure Cycle trades at a sharp discount to the underlying value of its land and water assets. It also has a solid strategy to monetize these assets. How? First, by selling the land, which consists of a master planned community (Sky Ranch). Then, it is selling water access to the residential properties built on said land.
In addition, the company is building houses itself on some of the lots, producing additional proceeds. A great way to gain exposure to hard assets during a period of high inflation (at a discount, no less), PCYO is a great opportunity at current prices.