Leave those "sell in May and go away" mantras to the superstitious. Just like any other month, there are plenty of interesting stock ideas that could make for compelling investments in May. There are loads of stocks of all colors worth your investment dollars, but let's zoom in on opportunities in small-cap stocks.
Three companies in the small-cap stock world that look particularly compelling to our contributors are TrueCar (NASDAQ:TRUE), Lumber Liquidators (NYSE:LL), and WD-40 Company (NASDAQ:WDFC). Here's a brief look at why these stocks are on our contributors' radar screens today.
Disrupting the car-shopping process -- in a good way
John Rosevear (TrueCar): Want an example of an industry that's ripe for disruption? Let's talk about car dealers -- or at least, the process of buying a new car. Negotiating a price is a miserable process for many buyers, and the feeling of having been fleeced can put a damper on what should be a happy day.
That's where TrueCar comes in. TrueCar works with thousands of new-car dealers (over 11,000 as of the end of 2016) to provide a simplified way for people to buy new vehicles. Consumers select the vehicle and options they want, find out the average price paid by others, and then are connected with local dealers who will give their last, best prices on that vehicle -- right up front.
For consumers, the service is free, as TrueCar gets paid by the dealers for connecting them with real buyers. In the fourth quarter, over 200,000 vehicles were purchased via TrueCar, with the company receiving a referral fee on each that averaged $320 per sale.
TrueCar isn't profitable yet, but it's growing, and its losses are narrowing. The company lost $41.7 million in 2016 (down from $64.9 million in 2015), on revenue of $277.5 million. Its current guidance calls for revenue growth of 13% to 15% in 2017, on similar growth in transactions.
CEO Chip Perry, who joined late in 2015, has a plan to boost growth by providing added support to car buyers throughout the purchase process. Nearly 60% of people using the internet to shop for a car stop by TrueCar's site, according to J.D. Power; Perry's goal is to capture as many of those as possible and to give them all a great experience.
Long story short: Under Perry, TrueCar has established credibility and trust with both dealers and consumers -- not an easy task. That gives it a bit of a moat and a path to growth that Perry and his team look set to follow. Give this one a look.
A recovering retailer that may be getting its mojo back
Chuck Saletta (Lumber Liquidators): Flooring retailer Lumber Liquidators saw its shares stumble severely in 2015 due to quality and environmental safety concerns over its Chinese-made flooring. The issue cost the company substantially, on many levels. It lost customers. It lost reputation -- and thus much of its near-term growth potential. It lost money fighting the claims made against it. It spent on customer satisfaction and recovery of any legitimate issues that may have occurred.
Yet many of the problems proved to be overblown. Lumber Liquidators claims that not a single plank of flooring that it tested in consumers' homes exceeded the safety limits for formaldehyde emission rates, which was at the center of the scandal it faced. Still, the reputational damage was done, the stock tanked, and the costs that Lumber Liquidators faced to deal with the issues were very, very real.
Still, Lumber Liquidators looks like it will likely survive and recover. Indeed, what makes the flooring specialist a reasonable potential buy this May is that it just reported earnings that continued its path toward recovery, aside from a major reserve for its biggest outstanding legal issue. Granted, there's still a gap between "didn't lose too much if you ignore legal costs" and "returned to its former glory," but operationally speaking, Lumber Liquidators continues to move in the right direction.
Investors buying Lumber Liquidators today still face the increased risks associated with owning a money-losing company with a less-than-perfect reputation. But the market's memory is short, and if Lumber Liquidators can finally get its legal settlements behind it and can return to profitability, those investors could be rewarded as it finally gets its mojo back.
Big-company returns in a small-cap stock
Tyler Crowe (WD-40 Company): You may not even realize it, but chances are you have a product in your house that is part of the WD-40 suite of brands. Aside from the iconic blue and yellow spray can, the company also owns several other maintenance and cleaning products that you use everyday.
What really makes this company unique isn't the products it sells. Rather, it's the way the business is structured. WD-40 doesn't actually manufacture any of the products it makes. It farms out the manufacturing to third-party suppliers and focuses on the marketing of the brands instead. The advantage of the third-party manufacturing is that it gives the company purchasing flexibility for when demand waxes and wanes, so no worries of covering the fixed costs of a factory. This also means that it is an asset-light business, which translates to high margins and incredibly high returns on capital.
Another added benefit of WD-40's asset-light business is it throws off lots of free cash flow -- about $0.14 per $1.00 of revenue -- that gets used to pay an increasing dividend and to buy back stock.
For a company that has a market cap of only $1.4 billion, it generates returns and allocates capital like companies more than 10 times its size. If you want a small-cap investment with a proven track record of generating returns for shareholders, then WD-40 company is worth a look.