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2 Top Small-Cap Stocks to Buy Now

By Joe Tenebruso - May 27, 2016 at 1:40PM

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These outstanding businesses could reward investors with handsome profits in the years ahead.

Small-cap stocks can deliver explosive gains -- or sizable losses. Choose well, and these high-risk yet potentially high-reward stocks can deliver multi-bagger returns and turbocharge your portfolio's overall performance. But choose poorly, and a small-cap stock can produce painful losses, up to and including a complete loss of capital should the business be forced into bankruptcy.

That's why it's so important to invest in only the best of these businesses -- those that possess the strongest competitive advantages and enjoy the largest growth opportunities. Read on to learn more about two excellent businesses that meet these challenging criteria, and that are two of the best small-cap stocks available in the market today.

Image source: Envestnet.

The wealth management platform

Envestnet (ENV 0.06%) is a leading provider of cloud-based software for investment managers and financial planners. Envestnet estimates its total addressable market to span across 265,000 advisors and more than $11 trillion in assets. Currently, Envestnet serves 49,000 of those advisors, who in turn manage 3.6 million accounts and work with about $880 billion in total assets. 

Envestnet's competitive advantage resides not only in the quality of its technology, but also in the integration of its product suite. In fact, Envestnet is striving to become a one-stop shop for wealth management professionals and has made significant progress in that regard, with offerings that include financial planning, proposal generation, trading, portfolio rebalancing, performance reporting, billing, client portals, and customer relationship management software, among other services. In addition, Envestnet's recent acquisition of Yodlee strengthens its service offerings with best-in-class data aggregation capabilities, helping Envestnet to provide more value to its users and further widening its competitive moat.

With a huge market opportunity and long runways for growth still ahead, Envestnet's business holds plenty of promise. And with a market cap of just $1.4 billion, so does its stock. As wealth managers continue to flock to its platform, I expect more and more investors to migrate toward Envestnet's stock, bidding up the price in the process, and rewarding those who buy Envestnet's shares today.

Image source: Zoe's Kitchen.

The regional-to-national growth story

Zoe's Kitchen (ZOES) is a quickly growing chain of fast-casual restaurants serving fresh, Mediterranean-style food. The company is early into its national expansion strategy, currently with only 177 locations in 19 states located mostly in the southern U.S. Yet management believes it can double that number by 2020, and that Zoe's could ultimately exceed 1,600 locations. With the company planning to open about 35 restaurants in 2016, that store count target represents years, and possibly even decades, of steady growth.

And it's not just unit expansion that's driving Zoe's growth; fourth-quarter comparable-restaurant sales leapt 7.7%, making it Zoe's 24th consecutive quarter of positive comp growth. That trend is likely to continue, with management forecasting a more than 4% rise in comps in 2016 as Zoe's rolls out new menu items, implements price increases, and expands its catering platform.

Importantly, Zoe's Kitchen is also becoming more profitable as it grows its store base. Restaurant contribution margin -- defined as restaurant sales less restaurant operating costs, as a percentage of restaurant sales -- increased 110 basis points to 21.1% in 2015. The company also posted a profit for the first time last year, with net income checking in at $2.6 million in 2015.

With a Mediterranean-inspired menu full of fresh ingredients such as lean proteins, olive oil, fruits, and vegetables, Zoe's Kitchen is well positioned to profit from the trend toward healthier fare and away from traditional fast food. Investors may wish to take a bite of Zoe's Kitchen's stock -- which currently fetches a market cap of only about $700 million -- as a means to profit beside this intriguing regional-to-national growth story.

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Stocks Mentioned

Envestnet, Inc. Stock Quote
Envestnet, Inc.
ENV
$52.80 (0.06%) $0.03
Zoe's Kitchen, Inc. Stock Quote
Zoe's Kitchen, Inc.
ZOES

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