Small-cap stocks, usually defined as those between $300 million and $2 billion in market value, typically get a bad rap on Wall Street. They're usually associated with higher risk and an increased chance of investment loss given their size and the perception among investors that they have untested business models.
However, this isn't always the case. In fact, some small-cap stocks can turn out to be absolute gems. Uncovering the next great small-cap stock could allow you to own the next Microsoft or Apple before they become a large-cap stock. But given the lack of Wall Street coverage on smaller stocks, the onus of research tends to be even more on the individual investor than with mid- and large-cap stocks. In other words, you have to be picky and willing to scrutinize even the minutest of details.
With this in mind, I set out to find small-cap stocks that I believe would appeal to long-term investors.
Coeur Mining, Inc.
One of the more exciting small-cap stocks worth considering this June is gold and silver miner Coeur Mining (CDE -0.64%). Scratching your head a bit? Well don't, because Coeur Mining is right in the middle of a major business transformation that's designed to lower its long-term costs and improve its gold and silver yields.
Traditionally, Coeur was a company that operated both open-pit and underground mines. While open pit can be cheaper to maintain, the ore grade and yields are much lower. Coeur made the decision to move its operations underground, which has boosted its near-term costs. However, it'll result in higher ore grades and recovery, ultimately lifting production and reducing its long-term all-in sustaining costs (AISC). If its first-quarter results are any indication, then the company is on the right track: Year-over-year silver equivalent ounce production rose 14% and AISC fell 6%.
Just as important is that the long-term outlook for physical gold and silver looks promising. Though the Fed is tightening monetary policy and raising interest rates, which tends to bode poorly for precious metals, other factors like rising inflation rates, constrained gold and silver supply, and uncertainty caused by the Trump presidency and Brexit are more than counteracting these adverse effects. Considering that Coeur Mining is the cheapest of all silver-based miners on the basis of future cash flow per share, it's worth a serious look as a top small-cap stock this June.
A small-cap stock I'd be willing to wager most investors have never laid eyes on before is ANI Pharmaceuticals (ANIP 3.40%), a Minnesota-based developer of branded and generic drugs. A majority of its sales are derived from the generic side of the equation.
Though generic-drug makers have faced recent scrutiny over their pricing practices in the U.S., they're nonetheless poised to benefit from a numbers game that's increasingly in their favor. High drug-price inflation for brand-name prescription drugs is pushing consumers and physicians to generics. As we head into the next decade, the IMS Institute for Healthcare Informatics predicts that we could see 91% to 92% of all prescriptions written for generics, up from 88%. Plus, the U.S. elderly population is expected to nearly double between 2015 and 2050, according to the U.S. Census Bureau, leading to what's expected to be a surge in prescription maintenance therapies. In short, ANI Pharmaceuticals is perfectly positioned with its generic portfolio.
ANI has also been an active acquirer of generic drugs. The company notes that 53 of the 76 drugs in its pipeline were acquired, and that 46 of them should be easily commercialized. The result? Wall Street is looking for ANI to nearly triple its sales to $348 million by 2019 and practically double its EPS to more than $7 per share over that timeframe. With a PEG ratio that's below 1, ANI Pharmaceuticals has all the hallmarks of a cheap small-cap stock.
A small-cap stock near and dear to this Fool's heart (and portfolio) is offshore driller Noble Corporation (NEBLQ). Like most offshore drillers, the tumble in crude prices over the past four years has reduced offshore drilling demand, backlog, and dayrates, putting the debt these companies incurred when oil was over $100 a barrel into focus.
However, I find plenty to still like about Noble Corporation, even if oil is trading around $50 a barrel. To begin with, Noble has a pretty large jackup fleet, and jackups are among the first rigs to benefit when crude prices head higher. I'm not entirely certain when that'll happen, but as a finite resource, I'd like to think higher prices are in the long-term forecast.
For that matter, it also has one of the youngest fleets of the offshore drillers. Younger rigs tend to be in higher demand due to their improved recovery and production rates. They also command higher dayrates, meaning potentially better margins for Noble.
Finally, Noble may be losing money on an adjusted EPS basis, but it's still generating positive cash flow that's allowed it to service its debt. In fact, its average loan maturity size through 2022 is only about $190 million annually, with the next big loan maturing in 2024. This breathing room and ability to remain cash flow-positive as a result of prudent spending is what makes me believe this top small-cap stock has what it takes to completely turn things around.
Last, but not least, fiber-optic components provider Oclaro (OCLR) could be a top small-cap stock worth a closer look. Unlike the prior three small-cap stocks that have struggled recently, Oclaro has been on fire, with shares having doubled over the trailing year.
Why Oclaro? For starters, fiber-optic demand is liable to increase as content providers expand their networks to be faster and transfer more data than ever. It might be hard to believe, but we're still in the early stages of really seeing data centers and the cloud bloom, leading to the expectation that companies like Oclaro can benefit from steady long-term product and innovation growth both in the U.S. and via emerging markets like China.
Need evidence? Take a look at Oclaro's third-quarter fiscal earnings results. Revenue for the quarter surged 60% year over year to $162.2 million, while gross margin catapulted higher by 14.5% from the prior-year period. The company attributed the growth to its 100G and beyond products, implying that data centers and cloud computing are likely behind this rapid rise in revenue.
Investors should also consider Oclaro as a possible buyout candidate. While I'd strongly recommend against buying any stock on the hope of a buyout, the writing is on the wall. Nearly all small- and mid-cap fiber-optic companies have been gobbled up by larger players over the past decade, and Finisar would likely make a perfect suitor given their complementary business segments. Plus, Oclaro's forward P/E of 13 and PEG ratio of 0.8 make it appear awfully cheap.