A common misconception about small-cap stocks is that they're volatile and risky. With quite a few small-caps stocks receiving very little coverage from Wall Street, there aren't enough analysts to argue against that perception.
However, the reality is that small-cap stocks can generate returns that are just as good, if not better, than mid- and large-cap stocks. In fact, the Vanguard Small-Cap ETF has doubled the year-to-date gains of the S&P 500 through Dec. 5 (16% versus 8%). If you take your time to weed through a veritable sea of small-cap stocks, you can find some green pasture.
Heading into 2017, there are a number of small-cap stocks ($200 million to $2 billion market cap) that could be worth buying and hanging onto for the long run. Here are four to consider.
Clinical-stage biotech small-cap Geron (NASDAQ:GERN) is poised for a potentially big year. The company's lead experimental drug, imetelstat, which it licensed to Johnson & Johnson (NYSE:JNJ) for $35 million in upfront cash, up to $900 million in milestone payments, and sales royalties if approved, is expected to yield top-line data in two phase 2 studies (IMbark and IMerge) next year. The results of these midstage trials for myelofibrosis and myelodysplastic syndromes will determine if Johnson & Johnson advances imetelstat into pivotal late-stage studies. Johnson & Johnson already ruled out the lower-dose for myelofibrosis due to its lack of efficacy in the IMbark study.
What makes imetelstat so intriguing is what it did in early stage studies in patients with myelofibrosis, a rare type of blood cancer that can lead to scarring of the bone marrow. Imetelstat generated partial and complete responses in myelofibrosis patients, which is truly impressive considering that no prior therapy had ever elicited a partial or complete response in clinical studies before. Comparatively, the only approved drug to treat myelofibrosis, Jakafi, is designed to alleviate the symptoms of the disease, not to treat the source of the ailment.
If approved, imetelstat could have the potential to eclipse $1 billion in annual sales, and it could make Geron an attractive buyout candidate.
Silver Standard Resources
A small-cap stock that's near and dear to my heart (and also a current core portfolio holding) is Silver Standard Resources (NASDAQ:SSRI), a gold and silver mining company. There are both macro and company-specific reasons to believe it could head significantly higher.
On a macro level, the opportunity cost of owning physical gold and silver remains relatively low, even with the prospect of the Federal Reserve continuing its monetary tightening and bond yields rising. The yields on interest-bearing assets simply aren't attractive enough to chase investors away from owning gold or silver. You can also argue that with gold and silver demand outpacing supply, the physical price of gold and silver should be supported.
In company-specific terms, Silver Standard is benefiting from lower costs at its silver Pirquitas mine, which is winding down operations, while at the same time it's enjoying increased cash flow from the Seabee Mine, which came with its purchase of Claude Resources earlier this year. The company's all-in sustaining costs of $940 per ounce for its gold production gives the company ample gross margin from the price of physical gold, even with gold's latest swoon. Furthermore, expansion opportunities following the purchase of an 80% interest in the Fisher property next to the Seabee mine may yield increased gold output in the future.
Wall Street occasionally has a tendency to rush into the next great technology with blinders on, which is sort of what happened with wireless communications solutions company CalAmp (NASDAQ:CAMP), a pioneer of Internet of Things (IoT) solutions, which are capable of connecting with other devices to collect and send data. Wall Street expected the world of IoT, and then punished CalAmp when its growth prospects were lower than expected.
Now here's the good news: the Internet of Things is expected to be an enormous market opportunity, it's simply taking time to develop and evolve. According to BI Intelligence, $6 trillion will be invested in the IoT between 2015 and 2020, with 24 billion IoT devices expected to be installed by the end of the decade (that's a 41% compound annual growth rate between 2015 and 2020). The opportunities for success should blossom for CalAmp as long as investors give the IoT sphere of products enough time to evolve.
CalAmp's appeal also ties into its $134 million acquisition of LoJack, which is expected to add about $0.20 at the midpoint to CalAmp's fiscal 2017 EPS. Not only does the purchase of LoJack boost profitability, but LoJack's vehicle tracking technology provides another pathway for CalAmp to infiltrate an auto industry that appears to be welcoming the IoT with open arms. I'm personally betting on a growth reacceleration very soon at CalAmp.
Another personal portfolio holding that could be worth serious consideration in the energy industry is offshore contract driller Noble Corporation (NYSE:NE). There's no hiding the fact that lower crude prices have taken their toll on offshore drillers, and Noble has not been immune to the pain. However, there's plenty to like if you're a patient investor like I am.
To begin with, Noble has done a good job of replacing its drilling fleet with newer rigs during highly profitable times. The result is that it has a relatively younger drilling fleet than its peers, meaning that its rigs are more efficient, can command a higher dayrate, and should remain in reasonably decent demand, even with oil hovering around $50 a barrel. Additionally, jackup rigs are usually the first to see an increase in demand when crude prices rise, which is great news since Noble has a large fleet of jackup rigs, meaning it could be among the first to rebound among the offshore drillers.
Noble's more than $4 billion in debt is also quite manageable. Roughly half of its debt isn't due until 2025 or later, and it's expected to produce more than $1 per share in cash flow in each of the next three years even with net EPS losses. In other words, Noble probably has better financial flexibility than Wall Street is giving it credit for. Couple this flexibility with a roughly 80% reduction in its capital expenditures next year compared to its average CapEx between 2011 and 2014, and you have what I believe to be a prudently managed (and attractive) driller.
Sean Williams owns shares of Silver Standard Resources and Noble Corporation, but has no material interest in any other companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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