Small-cap stocks, or those with a market cap of between $300 million and $2 billion, often get a bad rap on Wall Street. Smaller companies are typically viewed as having untested business models, therefore quite a few investors believe small-cap stocks to be more prone to volatility and losses. But small-cap stocks can also offer the most robust long-term gains if investors choose the right stocks to invest in.
According to Ibbotson Associates, which publishes its Stocks, Bonds, Bills, and Inflation Yearbook annually, small-cap stocks outperformed large-cap stocks by an annual average of 2.3 percentage points between 1926 and 2006. This isn't a small sample size -- we're talking about eight full decades here. Over a 30-year period, small caps would nearly double the return of the broad-based S&P 500 based on this recorded annual outperformance.
Of course, investors also have to be diligent in their pursuit of small-cap stocks, balancing a mixture of growth with value and industry opportunity. If there were three small-cap stocks that I'd suggest investors consider buying this August, it would be ANI Pharmaceuticals (NASDAQ:ANIP), CalAmp (NASDAQ:CAMP), and SSR Mining (NASDAQ:SSRM).
Any companies involved in the production of generic drugs have been taken to the woodshed of late, and ANI Pharmaceuticals is no different. This Minnesota-based specialty pharma company markets branded and generic drugs, albeit a majority of its revenue comes from the generic side of the equation. Unfortunately, generic drug pricing power has waned in recent quarters, causing pessimism within the industry.
However, this weakness could be an opportunity for investors. On a macro level, generic drugs remain the future of treatment for most patients. QuintilesIMS Institute for Healthcare Informatics has predicted that generic drug use will grow to roughly 91% to 92% of all prescriptions written by the turn of the decade, meaning volume growth can make up for a lack of near-term pricing power. Plus, this is a numbers game that generic drugmakers can win. The U.S. Census Bureau expects the elderly population aged 65 and over to nearly double between 2015 and 2050, and the elderly are far more reliant on prescription medicines than younger adults. All signs point to long-term success for generic drugmakers.
ANI has also been an active acquirer, having purchased 52 of the 76 generic therapies currently in its pipeline. Of these 52 acquired products, the company estimates that 45 can be commercialized with relative ease. The company is currently sitting on a pipeline of generics that addresses a market worth about $3.7 billion in annual sales.
Considering that Wall Street expects ANI Pharmaceuticals' annual earnings per share to nearly double to about $7 by 2020, this rapidly growing small cap in the healthcare space merits a closer look.
CalAmp is a company that's a direct play on the Internet of Things (IoT) -- essentially a producer of solutions that allow devices to communicate wirelessly with one another. According to BI Intelligence, by 2020, there are expected to be 24 billion IoT devices installed (representing 41% compound annual growth between 2015 and 2020) and $6 trillion invested in the IoT space. These figures are large enough for multiple companies to succeed, including a direct player like CalAmp.
Unfortunately, investors' expectations for CalAmp often exceed what it actually delivers on a quarterly or annual basis, which has hurt its stock. Recently, CalAmp divested its satellite business, which made up a bit more than 10% of its sales at one point, to focus on its higher-growth wireless solutions business. In its fiscal first quarter, reported nearly two months ago, it delivered 6% organic growth. This isn't bad at all, but given its recent divestiture and litigation costs, investors appear to be overlooking a company with a solid foundation for the future.
Another interesting catalyst for CalAmp is its acquisition of car-theft recovery systems maker LoJack for $134 million last year. The purchase of LoJack is less about an immediate accretion to EPS so much as it strengthens CalAmp's ties to the automotive industry. Autos offer perhaps the most immediate and robust opportunity for IoT solutions. This includes everything from parallel parking technology to accident avoidance.
Long story short, CalAmp is positioned for success. Now all that's missing are patient small-cap investors who will allow management the time to execute on its strategy.
Let's end with a gold and silver mining company that's already part of this writers' portfolio, SSR Mining. SSR, which recently changed its name from Silver Standard Resources, did so to reflect its newfound focus on gold, which should make up about 80% of total revenue in 2017.
The big impetus of late for SSR Mining was its June 2016 acquisition of Canadian-based Claude Resources and its Seabee mine. Expansion at the Santoy Gap within the Seabee complex boosted ore grade and output for Claude, which led to significant cash flow expansion. It also created the perfect lure for SSR Mining to acquire Claude. The results have thus far been promising, with the full-year production forecast for Seabee upped following SSR Mining's second-quarter results to a new range of 75,000 ounces of gold to 85,000 ounces of gold (a 3,000-ounce increase to the top and bottom end of the prior range).
SSR Mining also cast aside recent concerns over its Pirquitas property in Argentina. Its current silver mining operation ceased production a few quarters ago and has been selling off its remaining stockpile. If SSR Mining did nothing, it would become an entirely gold-reliant company in 2018 and beyond. However, in May, SSR and Golden Arrow forged a respective 75%/25% joint venture known as the Chinchillas project that'll generate silver production for up to a decade beginning in the second half of 2018.
Since most precious-metal mining company are fairly valued at around 10 times their cash flow per share (CFPS), and SSR Mining is current valued at closer to eight times next year's CFPS, this current shareholder believes new investors will find a bargain to be had.