7 Small-Cap Stocks to Buy on the Dip

  • Although small-cap stocks to buy can be risky, they also bring a lot of upside potential to the table.
  • Warby Parker (WRBY): While shares of Warby Parker are down significantly this year, myopia trends are moving cynically in favor of WRBY.
  • Fastly (FSLY): Specializing in content delivery network, Fastly may have lost some relevance recently but it still maintains a strong list of enterprise-level clients.
  • Ero Copper (ERO): With the namesake asset being indispensable for the industries of tomorrow, Ero Copper is one of the small-cap stocks to buy on the dip.
  • Rite Aid (RAD): Although Rite Aid again finds itself lagging its competitors, it can also ride the coattails of the retail pharmacy sector, which is expected to grow.
  • Heritage Insurance Holdings (HRTG): An influx of homebuyers desiring to protect their investments could make Heritage Insurance one of the small-cap stocks to buy.
  • Hydrofarm Holdings (HYFM): A smarter way to play the “botanical” industry while keeping your nose clean, Hydrofarm Holdings presents an intriguing idea for small-cap stocks to buy.
  • Wheels Up Experience (UP): Aligning itself with the broader desire to make memories, Wheels Up Experience could be surprisingly relevant.
Small-Cap Stocks to Buy on the Dip - 7 Small-Cap Stocks to Buy on the Dip

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Generally defined as companies featuring a market capitalization between $300 million to $2 billion, small-cap stocks to buy have always appealed to speculators. Geared for tremendous growth, if you happen to catch one of these exciting ideas at the right time, your portfolio can easily skyrocket. But with the wild volatility we’ve seen in the first half of 2022, many under-the-radar equities are priced even more attractively.

Of course, investors should realize that — as with anything in life — the greater the reward potential, the higher the risk. To use a sports analogy, you should consider small-cap stocks to buy on the dip as going for it on fourth down as opposed to kicking a field goal. You should expect your fair share of interceptions and a couple of sacks along the way.

At the same time, some of your bold moves will end up on the highlight reel. If you have the penchant for speculation, then these small-cap stocks to buy could be for you. Just keep in mind that these ideas are on the aggressive side so let the buyer beware.

Ticker Company Recent Price
WRBY Warby Parker $12.50
FSLY Fastly $12.09
ERO Ero Copper $8.86
RAD Rite Aid $7.79
HRTG Heritage Insurance Holdings $2.52
HYFM Hydrofarm Holdings $3.80
UP Wheels Up Experience $2.28

Warby Parker (WRBY)

At the close of the July 8 session, shares of Warby Parker (NYSE:WRBY) — an online retailer of prescription glasses, contact lenses and sunglasses — found themselves down almost 75% on a year-to-date basis. Over the trailing five days, WRBY did gain 4% but that would be of little comfort to those folks that bought into the company’s initial public offering back in October 2021.

To be fair, Warby Parker has mixed financials, so it’s understandable why many investors are hesitant. Although it has some decent strengths in its balance sheet — such as a cash-to-debt ratio of 1.52x — Warby’s profitability metrics are terrible.

True, the company posted revenue of $153.2 million in the first quarter of 2022, a 10% improvement year-over-year. However, investors remain concerned about its widening net losses.

Here’s the cynical catalyst for WRBY, though: myopia is rising. Indeed, experts project that by 2050, almost half of the world will be myopic. If Warby can hang on, it could end up being one of the best small-cap stocks to buy on the dip.

Fastly (FSLY)

A technology firm specializing in content delivery networks, Fastly (NYSE:FSLY) is an edge cloud platform, helping developers extend their core cloud infrastructure to the edge of the network, closer to users. When it launched its IPO in May of 2019, FSLY didn’t really move much. Then came the coronavirus pandemic and everything changed.

Following a brief dip into the spring doldrums of 2020, Fastly quickly rocketed higher. A combination of the grand work-from-home experiment along with quarantined individuals bored out of their mind logging onto streaming platforms simultaneously placed significant strain on internet traffic. The dynamic called Fastly into action, leading to significant gains.

However, FSLY now trades as if it entered a time machine back to the initial strike of Covid-19. Such a valuation erosion could be too steep, considering that Fastly partners with several digital innovators, including Yelp (NYSE:YELP), New York Times (NYSE:NYT) and Reddit. Thus, speculators should consider FSLY as one of the small-cap stocks to buy on the dip.

Ero Copper (ERO)

Ero Copper (NYSE:ERO) is a high-growth clean copper producer with an extensive operational network in Brazil. While geopolitical events — namely Russia’s invasion of Ukraine — helped drive up demand for commodities as international policymakers scrambled for alternative avenues for critical resources, in recent months, hard assets have struggled.

Largely, global recession fears along with the Federal Reserve’s commitment to tackling inflation at (almost) any cost has many industries worried. Naturally, shares of ERO suffered, losing more than 41% year-to-date. Still, the selloff could be overdone.

Fundamentally, it’s important for investors to understand that copper is not only relevant for manufacturing needs today but also undergirds the industries of tomorrow. Mainly, copper plays a significant role in the electric vehicle rollout. Therefore, it might be well worth it to keep close tabs on ERO as one of the small-cap stocks to buy on the dip.

Rite Aid (RAD)

A well-known name in the retail pharmacy sector, Rite Aid (NYSE:RAD) has also been one of the more frustrating names among small-cap stocks to buy. Back in late 2019, Rite Aid’s leadership team stated that the embattled company’s turnaround “will take some time” as it executes fresh initiatives. Then, the Covid-19 crisis came and provided Rite Aid with a cynical tailwind.

Suddenly, retail pharmacies were the place to be to pick up essential goods and critical over-the-counter medication. If you recall, those were apocalyptic days, with customers fighting each other for otherwise mundane items like toilet paper.

Now that fear of the SARS-CoV-2 virus has faded, the pecking order in the industry has emerged, with Rite Aid once again finding itself in the back.

However, for aggressive traders, two possible catalysts could materialize. First, another health crisis could emerge, which could lift RAD. More realistically, though, Rite Aid could ride the coattails of its underlying industry. Experts project that the sector could expand at a compound annual growth rate (CAGR) of 6.3% from 2021 to 2028, where it may hit a valuation of $861.7 billion.

Heritage Insurance Holdings (HRTG)

A premiere provider of property and casualty insurance, Heritage Insurance Holdings (NYSE:HRTG) might offer speculators of small-cap stocks to buy an extreme high-risk, high-reward opportunity. Mainly, the great housing boom of the new normal may have plenty of new homebuyers thinking about protecting their most expensive investment.

Another factor that plays into the above narrative is Heritage Insurance’s regional focus, particularly in the Carolinas and Florida. Both of these regions have become popular with millennials who have sought out alternatives to high-priced coastal metropolitan areas. Therefore, over the long run, Heritage could be one of the small-cap stocks to buy that emerges from its present funk.

Of course, the funk is pretty bad, with HRTG shares down more than 57%. However, one encouraging note is that Heritage posted revenue of $152.9 million in Q1 2022, which was up 7.5% from the year-ago level. Therefore, HRTG could make its way back up the charts.

Hydrofarm Holdings (HYFM)

While Hydrofarm Holdings (NASDAQ:HYFM) specializes in botanical technologies such as hydroponics, it’s not a “botanical” player if you know what I mean. If you don’t, a Bloomberg article from December 2020 covering Hydrofarm’s IPO was far more suggestive, declaring that investors were investing in pot growth without the pot.

To be clear, Hydrofram’s management team is adamant that it does not touch the green stuff directly. Further, it claims it does not sell its equipment to “cultivators” — wink, wink.

However, many analysts did point out that Hydrofarm is the smarter way to play the legalization business. By offering the equipment people need to expand their agricultural ambitions, Hydrofarm is selling tickets to the game, not a wager on which one team will win out.

That said, HYFM is one of the riskiest small-cap stocks to buy, having lost 87% YTD. Only gamblers with the strongest conviction need apply.

Wheels Up Experience (UP)

A provider of on-demand private aviation in the U.S., Wheels Up Experience (NYSE:UP) is also one of the largest private aviation companies in the world. One of the potential catalysts that could drive up shares is pent-up demand for memory-making experiences that were lost during Covid-19. Now, people are ready to reclaim that lost time under a phenomenon called revenge traveling.

Also, it’s possible that with the money saved during the period of the pandemic when Uncle Sam was handing out stimulus checks, consumers may be ready to splurge on once-in-a-lifetime experiences. However, that’s not the biggest catalyst I had in mind.

Rather, I’m cynically thinking about the wealth gap. Essentially, one of the biggest beneficiaries of the Covid-19 crisis was the top 1% of society, which saw its share of total net worth expand to 31.9% from 29.7% just before the SARS-CoV-2 virus capsized the planet.

In other words, Wheels Up may have a larger consumer base, making it one of the small-cap stocks to buy on the dip.

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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