For those investors interested in small-cap stocks to buy, you might steer clear of tech names. At least, that’s according to the analysts at Jefferies.
Jefferies analyst Steven DeSanctis recently discussed why his firm is underweighting small-cap tech stocks.
“‘When we talk to investors, it seems like they are heading right back into tech, and we see flows to its ETFs accelerate as well,’ Jefferies analysts led by Steven DeSanctis said in an equity strategy note Wednesday [Aug. 31], referring to exchange-traded funds focused on the sector. ‘We don’t think this makes sense,’” Marketwatch reported.
DeSanctis went on to say that small-cap tech stocks are trading at an average of 3.4 times their sales. While that’s a lower valuation than in recent years, it’s still 62% higher than the historical norm of 2.1 times sales.
What should investors who are trying to buy Wonka’s Golden Ticket do?
By that, I mean, if you’re searching for small-cap stocks whose prices will jump ten-fold over the next five years, you’ve got to take some risks to get those outsized rewards.
Can it happen? You bet it can. However, it’s a tall order. You’ll need an average compound annual growth rate of 59% to get there.
With that in mind, I’ve selected three small caps from the S&P SmallCap 600 whose revenue and earnings can grow quickly enough to meet the target.
|PLAY||Dave & Buster’s||$41.21|
Dave & Buster’s (PLAY)
Dave & Buster’s (NASDAQ:DAVE) got walloped in 2020 by Covid-19 lockdowns. Its sales fell through the floor, prompting activist investors KKR & Co (NYSE:KKR) and Hill Path Capital to buy up the shares of the operator of high-volume entertainment-and-dining venues.
On July 11, 2022, Hill Path entered into a revised cooperation agreement with the company which states that it can acquire up to 19.99% of the company. As long as Hill Path partner James Chambers or another partner serves on the board, the investment firm can’t acquire 20% or more of PLAY stock.
Chambers has served on the board since December 2020, when the two parties signed the original cooperation agreement. Hill Path’s filing said it owned 5.11 million shares of the company’s shares. Based on 48.93 million shares outstanding, Hill Path owns 10.4% of the company’s shares.
In April, Dave & Buster’s announced that it would acquire Main Event, a family entertainment concept with 50 U.S. locations, for $835 million, including the assumption of debt. The transaction was completed at the end of June. Main Event CEO Chris Morris became Dave & Buster’s CEO as part of the deal.
In mid-July, Morris and the rest of the executive team provided investors with an update.
The combined company will have 200 locations in 41 states, $1.9 billion of annual revenue, and $522 million of adjusted earnings before interest, taxes, depreciation and amortization (EBITDA).
Dave & Buster’s competes in the North American family entertainment center market. The market’s revenue is estimated to be $7.7 billion, growing to $9.7 billion by 2025.
PLAY has got a shot to get big.
Lantheus Holdings (LNTH)
Lantheus Holdings (NASDAQ:LNTH) provides imaging diagnostics, targeted therapeutics, and artificial intelligence solutions to healthcare clinicians and technologists in the U.S., Europe, Canada, and elsewhere. Based in Massachusetts, it became an independent, publicly-traded company in June 2015.
The five analysts who cover LNTH stock all rate it a buy, with an average price target of $103.20, versus its current share price of $78. The shares need to advance more than that each year if they’re going to increase ten-fold by 2027, but the price targets are encouraging.
The company reported its Q2 results in early August. They were very healthy. On the top line, its revenues jumped 121% to $223.7 million, while its net income, excluding certain items, soared 708% year-over-year to $62.9 million, or 28.1% of its revenue.
“Our record-setting financial results for the first half of 2022 reflect the strength of our strategy and our ability to drive long-term growth,” said Mary Anne Heino, President and CEO. “PYLARIFY, which is firmly established as the PSMA PET imaging agent of choice, continues to propel our growth and have a positive impact on the U.S. prostate cancer community.”
For all of 2022, it expects revenue of $895 million and adjusted earnings per share of $3.55 at the midpoint of its guidance. Based on its current share price, it’s trading at 6.1 times revenue and 22.2 times earnings. Both are very reasonable.
Its free cash flow (FCF) in the first six months was $75.3 million, more than double a year earlier. On an annualized basis, its FCF yield is 2.8%. That’s hardly cheap, but with Pylarify flying off the shelves since its May 2021 approval by the U.S. Food and Drug Administration, it’s not outrageous.
I’d suggest watching this one very closely.
LiveRamp Holdings (RAMP)
LiveRamp Holdings (NYSE:RAMP) reported its results on Aug. 4. It lost 15% in a single day of trading. In the 18 days after that, it has fallen during two-thirds of the trading days.
Why am I interested in LiveRamp?
On page 4 of its Q1 2023 presentation, three numbers about the cloud-based data connectivity platform’s business stand out:
- LiveRamp’s fiscal Q1 2023 annual recurring revenue (ARR) was $409 million, 20% higher year-over-year. That’s good without being too good. It’s manageable growth.
- It reported that 90 of its clients spent $1 million or more in Q2. That’s 29% higher than during the same period a year earlier.
- Its operating profit, excluding certain items, in the quarter was $4 million, its ninth consecutive profitable quarter. It lost $26 million, including all items, but it’s still scaling the business.
At present, the company expects its revenues in 2023 to be $595 million at the midpoint of its guidance, with operating income , excluding certain items, of $39 million. It’s early in the fiscal year so things can change on a dime, but these are healthy numbers.
Seven of the nine analysts covering RAMP rate it a buy, and two have holds on it Their average price target on the name is $36.11, versus its current share price of $19.20.
With the shares trading at a forward price-sales ratio of 2.3 times, I believe that it has reached an attractive entry point.
On the date of publication, Will Ashworth 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.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.