Small-cap stocks are making a comeback and investors who hop on now will likely reap juicy returns. These companies are currently trading at a discount compared to their larger counterparts, which presents a great buying opportunity. According to experts, this is only the beginning of a small-company bull market.
A New Bull Market Emerges
Once the S&P 500 rises more than 20% off a market bottom (which just happened), it continues to rise over the next year 92% of the time. That’s according to Savita Subramanian, head of U.S. equity strategy & U.S. quantitative strategy at Bank of America Merrill Lynch. The average return over this period is 19%, presenting an attractive opportunity for investors that like to take on a little risk. As investors catch wind of this trend, they will be more confident in shifting to “risk on” asset classes like small-caps, creating more demand and driving prices up further.
Interest Rates Become More Normal
Furthermore, U.S. interest rates are becoming more normalized after near-zero real rates have persistently created a headwind for small-caps. Low rates have favored assets like the tech and biotech stocks that produce most of their earnings in the distant future. This has resulted in more favorable valuation models for longer duration stocks, ultimately making them look cheaper. Fortunately for small-caps, that is changing, and they stand to profit from it, says James Stoeffel, manager of the Royce Small-Cap Opportunity Fund.
Opportunity Knocks for the Underdogs
During the Great Financial Crisis, both small-caps and large-caps fell by similar amounts. However, in recent times small-caps have taken an even bigger hit than their large-cap counterparts. Kevin Rendino, CEO and portfolio manager at 180 Degree Capital, notes that small-caps are currently trading at around 75% of the p/e ratio of large-caps. This is a discount compared to a p/e ratio of up to 120% in the period from 2008 to 2020. According to Kevin, this discrepancy makes little sense and provides a tremendous buying opportunity.
Are you ready to invest in small-cap stocks? With the bull market just beginning and interest rates normalizing, now could be the right time to take on a little risk and maximize your returns.
Investing in Under-$5 Stocks: Opportunities and Risks
Investors are often fascinated with under-$5 stocks, especially when animal spirits prevail, as sub-$5 stocks can produce big percentage gains quickly. They offer tremendous opportunities for investors seeking to profit from undervalued small-cap companies that have strong growth potential. However, it’s important to note that these stocks are also risky and, as such, require a fair level of diversification in one’s investment portfolio.
According to Michael Corbett of Perritt Capital Management, a company specializing in investing in small-cap stocks, cheap valuations rarely provide insight into when a group will outperform. However, the deep discounts found in under-$5 stocks suggest that they will likely outperform by a lot once they get rolling.
Diversification is key when investing in under-$5 stocks. Investors should avoid taking concentrated positions and consider having a fair level of diversification in their portfolio. For example, the Royce Small-Cap Opportunity fund holds approximately 250 stocks, with the median position size being only 0.37% of the portfolio. The fund caps its positions at 1%, which is a good way to navigate the risks of investing in small-cap stocks.
Choose under-$5 stocks wisely. Many companies with low-priced stocks need a turnaround, and when you find one making positive changes, the gains can be impressive. When buying these stocks, it’s important to be patient and avoid buying on spikes. Bullish developments are less likely to be priced in, so taking the time to research and select these stocks carefully is crucial.
Top 5 Under-$5 Stock Holdings
Here are five under-$5 stock holdings that have been chosen by fund managers with successful track records in investing in small-cap stocks. However, investors should avoid buying these stocks if they move above the limit price due to their volatility:
- MamaMancini’s Holdings (MMMB) – Buy Limit: $3
- [Stock 2]
- [Stock 3]
- [Stock 4]
- [Stock 5]
MamaManicini’s is a food company that sells over 50 all-natural lines of food to grocery stores and distributors. The company was founded by Dan Dougherty, whose grandmother, Anna “Mama” Mancini, moved to Bay Ridge, Brooklyn from southern Italy with old-world Italian recipes. MamaManicini’s products are now available at Walmart, Costco Wholesale, Albertsons, and others. The company also markets on QVC.
Although the stock performance has been affected in the past two years due to supply chain issues and inflation, these issues have been recently resolved. The company has fixed its supply chains and tackled inflation by raising prices. Moreover, it is growing via acquisition, making it a buy for investors.
Buy limit: $3
DHI Group (DHX)
Buy limit: $4.10
Quantum Corp. (QMCO)
Quantum Corp. is a data storage company that provides solutions for video and rich media workflows. It has a broad customer base that includes businesses of all sizes and public sector organizations.
The company’s stock has underperformed in recent years due to issues with its technology and integration of its products. However, it has recently resolved these issues and is now in a position to grow. Quantum’s recent acquisition of ActiveScale, a data storage system, will help it expand its footprint in the media and entertainment industry.
Buy limit: $1.10
Quantum: Data Storage for AI and Machine Learning
Quantum is a company that specializes in data storage and management products, with a focus on video, image, and scientific data. Their products are instrumental in video editing, streaming, and high-speed backup. Quantum faces stiff competition from industry giants like Dell Technologies’ EMC division, International Business Machines, and NetApp. However, Quantum still manages to hold its own against these behemoths with its competitive offerings.
“This is the year where they show they can grow the business and margins or they will have to sell the company,” says Rendino, an activist manager. “The company may be too small to be public,” he adds. Either scenario, growth or sale, would be beneficial for shareholders.
Heritage Global: Capitalizing on Economic Downturns
Heritage Global is a liquidator that buys unwanted equipment, real estate, and inventory from companies that are streamlining or going out of business. The company then resells these goods at a profit. Additionally, Heritage Global has a division that assumes bad loans from banks and attempts to collect uncollected receivables. Economic downturns, like the current one, bring in more business for Heritage Global.
As of March, bankruptcies in the US had increased by 38% year-over-year, according to Bank of America. At a buy limit of $4.10, Heritage Global may be an attractive option for investors looking to capitalize on this trend and invest in a company with a proven track record of success.
Top Growth Stocks To Buy Now
Ribbon Communications (RBBN)
Ribbon Communications RBBN, a communications equipment seller, is a promising growth stock to watch out for. With Verizon Communications VZ as a customer, the company is successfully marketing competitive products that are in demand. The telecom giant accounts for about 15% of the company’s revenue, indicating a strong relationship between the two entities.
Three factors boost RBBN’s potential for growth. Firstly, the demand for bandwidth has increased due to work from home culture, driving up the market demand. Secondly, the global banning of equipment from China’s Huawei Technologies from national networks has created a vast market that needs to be filled. Lastly, this is a turnaround story, and the company is gaining traction with customers after three years of investment.
The company reported first-quarter sales of $186.2 million, representing a 7% increase. CEO Ross Dove stated that this is only the beginning as they expect to build on the growth momentum and continue improving throughout 2023. Dove recently purchased $1.35 million worth of stock at $2.60 a share, thus strengthening the insider signal.
Corbett of Perritt Capital Management also believes RBBN has tremendous potential with increasing volumes further improving every quarter. The first quarter saw a massive 77.5% increase in revenue to $16.6 million, and net income also improved four-fold to $2.8 million.
In conclusion, Ribbon Communications (RBBN) is an excellent investment opportunity for those seeking growth potential in a promising market.
U.S. Stocks Poised to Rise in December
If you’re an investor, you’ll be happy to know that the odds are in your favor for U.S. stocks to rise this December. In fact, there’s a 2-in-3 chance that they will do just that.
According to market experts, this is due to a number of factors, including the positive economic climate and strong corporate earnings. Additionally, there is a growing sense of investor optimism as we approach the end of the year.
If you’re looking to take advantage of this potential uptick in the market, consider diversifying your portfolio with a mix of well-performing funds. Our simple 8-fund portfolio has consistently outperformed the market and “smart” investment strategies.
So, keep an eye on the markets and position yourself accordingly for potential big returns in December.