7 Lesser-Known Small-Cap Stocks to Keep on Your Watchlist

  • With so much flak in the sky, investors may want to keep their head down with compelling small-cap stocks that could marinate into strong performers.
  • Sally Beauty (SBH): A global distributor and retailer of professional beauty products, Sally Beauty could be one of the top small-cap stocks to buy on the return to normal.
  • Carparts (PRTS): With auto prices skyrocketing, drivers are more incentivized to repair their cars, thus bolstering Carparts.com.
  • Diversified Healthcare Trust (DHC): A real-estate investment trust, Diversified Healthcare Trust focuses on life science, medical office properties and the relevant senior care sector.
  • AFC Gamma (AFCG): Providing institutional loans for the cannabis industry, AFC Gamma is one of the high-risk, high-reward small-cap stocks to buy.
  • Electromed (ELMD): Specializing in products designed for patients with impaired airway clearance, Electromed is a small company with a big heart.
  • Allied Motion Technologies (AMOT): With its volatility dying down recently, Allied Motion Technologies' specialized control mechanisms may turn out to be quite intriguing.
  • Wheels Up Experience (UP): A possible play on the increased demand for experiences, Wheels Up is a private jet charter company, offering unique memory-making opportunities.
small-cap stocks - 7 Lesser-Known Small-Cap Stocks to Keep on Your Watchlist

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Although the latest downturn in the equities sector presents some intriguing opportunities in larger-capitalization companies, investors shouldn’t ignore lesser-known small-cap stocks. To be fair, organizations outside the mainstream spotlight tend to be riskier as they may not enjoy as robust of a financial profile as their larger counterparts. Still, they may offer significant punch once the market eventually rises.

In addition, the brewing fears of a worldwide recession have cast a rather dark shadow on many blue-chip stocks. While I’m not going to name names here, we all know much-hyped companies that were the toast of town in 2021 that have suddenly experienced a rude awakening this year. On the other hand, while small-cap stocks weren’t exempt from the volatility, their low profile can be an advantage during difficult times.

Further, the major institutions tend to own the household names. Therefore, ahead of a possible recession, several blue chips could end up being on the chopping block. Here again, the small-cap stocks may have an advantage because fewer institutional players are looking to jettison them.

You’re going to still need to conduct your own due diligence. But as you explore your options, keep these small-cap stocks in mind.

Ticker Company Current Price
SBH Sally Beauty $12.73
PRTS Carparts $8.30
DHC Diversified Healthcare Trust $1.98
AFCG AFC Gamma $16.83
ELMD Electromed $10.55
AMOT Allied Motion Technologies $23.09
UP Wheels Up Experience $2.34

Sally Beauty (SBH)

The beauty and personal care industry might not be the most intuitive place to find opportunities in the equities sector right now. Still, investors who like to think outside the box should consider Sally Beauty (NYSE:SBH). A global distributor and retailer of professional beauty products, Sally is one of the most intriguing small-cap stocks to buy based on the return to normal from the coronavirus pandemic.

As a Washington Post op-ed mentioned, 2020 could be considered “our pajama moment.” Not much emphasis was placed on outward appearance because let’s be real: we didn’t have to show up to work. And for many employees, communication occurred through emails and platforms such as Slack. However, now that a growing number of companies are recalling their workers — including one very prominent voice — beauty products might rise in demand.

Fundamentally, against a basket of valuation metrics, SBH is considered modestly undervalued. As well, the company features excellent profitability margins relative to its industry.

Carparts (PRTS)

One of the many benefits of YouTube is that — so long as you follow the right content creators — you really can earn the equivalent of a doctorate degree in whatever subject you’re seeking expertise on. However, when it comes to getting finance-related advice from YouTube luminaries, the results can vary wildly. For instance, those that urged people to avoid buying a car in 2020 and 2021 have angered viewers because car prices are still rising.

However, this dynamic might cynically benefit Carparts (NASDAQ:PRTS) because it strongly suggests that more people will hold onto their cars for longer. Indeed, the Wall Street Journal already mentioned that the average age of vehicles on U.S. roadways hit a record 12.2 years. So, if prices keep rising, demand for car parts may increase as the repair bills roll in.

Of course, there are two sides to this narrative because it might make more sense to outright replace an aging car with a new (or somewhat new) vehicle. Still, inflationary pressures pose challenges to many households, which cynically bodes well for PRTS as one of the small-cap stocks to consider.

Diversified Healthcare Trust (DHC)

Generally speaking, real-estate investment trusts (REITs) like Diversified Healthcare Trust (NASDAQ:DHC) offer an excellent mechanism to balance your portfolio. To qualify as a REIT, the company must pay out 90% or more of its taxable income to shareholders as dividends. Therefore, you can depend on some passive income while you wait out a possible recessionary storm.

Another factor that puts DHC in a positive light is the underlying focus. Specializing in the life science, medical office properties and senior care/retirement facility sectors, Diversified Healthcare Trust is exceptionally relevant. For instance, the life science segment broadly received a massive boost due to the innovative development of Covid-19 treatments and vaccines.

As well, senior care is a huge industry thanks to the number of baby boomers retiring. Keep in mind that it was only until relatively recently — summer of 2019 — that millennials overtook baby boomers as the largest living generation in America. These fine folks have to be taken care of, thus potentially lifting DHC as one of the small-cap stocks to buy.

AFC Gamma (AFCG)

While publicly traded cannabis firms amassed significant interest upon their debut, there’s a good chance you haven’t heard of AFC Gamma (NASDAQ:AFCG). One of the newest players in the broader botanical industry, AFC is a leading provider of institutional loans to high-quality cannabis operators nationwide. Moreover, it provides capital for all aspects of production: cultivation, processing and distribution.

Specifically, AFC offers loans and related facilities, which are typically secured by major assets, such as real estate, licenses and cashflow. While any company tied to the cannabis business is risky due to myriad competitors and legal vagaries, AFC is more of an infrastructure play rather than a brand-centered investment. As well, the secured loans provide a much-needed framework of confidence.

Still, I’d classify AFCG as one of the high-risk, high-reward small-cap stocks to buy. It has potential because rising stress levels might boost cannabis sales for those seeking a release. Nevertheless, it’s a competitive industry exposed to the risk of commoditization.

Electromed (ELMD)

One of the most intriguing small-cap stocks levered to the medical device industry, Electromed (NYSEAMERICAN:ELMD) is the manufacturer of the SmartVest, which provides an effective solution for airway clearance. Specifically, the product aims to provide relief for patients suffering from bronchiectasis and chronic obstructive pulmonary disease (COPD).

Among the advantages of Electromed is the total addressable market. According to the Centers for Disease Control and Prevention, COPD affects more than 15 million Americans. Alarmingly, more than 150,000 sufferers in the U.S. die from the condition each year. Therefore, any kind of relief would be gamechanger.

Another factor that’s very intriguing from an investment perspective is that Electromed features strong financials. For instance, the company has a very robust balance sheet unencumbered with debt: a rarity among small-cap stocks. Also, it has decent profitability metrics, making ELMD a modestly undervalued idea.

To be fair, ELMD is down 18% on a year-to-date basis, but this ship could eventually right itself in a big way.

Allied Motion Technologies (AMOT)

Arguably among the underappreciated small-cap stocks to buy, Allied Motion Technologies (NASDAQ:AMOT) develops advanced motion control products for multiple industries, including aerospace and defense, automation and robotics, medical and vehicle markets. Even with each category, Allied provides a wide array of applications.

For instance, under the vehicle segment, Allied offers anything from power steering assist actuators for all-terrain vehicles (ATVs) to autonomous vehicle laser sensors. In the aerospace and defense segment, the company provides technologies for unmanned vehicles (particularly munitions disposal robots) and fuel pumps for commercial airliners, among many other applications.

Obviously, with the military conflict in eastern Europe, Allied Motion’s acumen has suddenly been thrust into the limelight. Therefore, future conflicts may lead to greater demand for its cutting-edge products.

To be clear, AMOT is a risky name among small-cap stocks to buy. However, the volatility appears to have died down over the trailing month. Therefore, speculators might want to give AMOT a shot.

Wheels Up Experience (UP)

According to its website, Wheels Up Experience (NYSE:UP) connects flyers to private aircraft, thereby delivering an exceptional, personalized experience. It might sound like a stretch, totally disconnected from the reality of our time, which of course is characterized by the rapidly eroding purchasing power of the U.S. dollar.

Still, one element that has surprised many analysts is the resilience of the travel sector. While inflation is certainly weighing down many households, quite a few people insist on traveling because of the revenge travel concept. Basically, pent-up demand from two years of lockdowns and mitigation measures has folks going stir crazy. Therefore, splurging on private flights might not be as wild of an idea as you might initially think.

Nevertheless, it must be said that UP is ironically the riskiest name on this list of small-cap stocks. It’s down almost 50% YTD in the market and the underlying company has terrible profitability metrics. However, its balance sheet features a very strong cash-to-debt ratio of 4.34x, so that’s one saving grace to consider.

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.


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