Small-cap stocks are often ignored by analysts and financial media outlets alike. That gives savvy investors a chance to zero in on largely unknown tickers before they become media darlings and household names. There's money to be made here if you know where to look.
To get you started in the field of small but potentially great companies whose stocks are poised for big gains in the long run, we asked a few Motley Fool contributors to share their best small-cap ideas of the moment. Read on to see why they recommend TechTarget (NASDAQ:TTGT), RedFin (NASDAQ:RDFN), and Craft Brew Alliance (NASDAQ:BREW).
A real-estate disruptor
Jeremy Bowman (Redfin Corporation): Redfin may not be a household name yet, but if you're in the market for a new home, you'd do well to get to know it.
Like its peer Zillow (NASDAQ:Z) (NASDAQ:ZG), Redfin is disrupting the real-estate market with online listings, but Redfin operates differently from Zillow. While Zillow relies on advertising from real-estate agents to drive its business, Redfin seeks to circumvent the traditional real-estate model by selling properties through its own agents and making the experience customer-centric by lowering commissions, incentivizing customer service, and using technology to make the search for a new home better and easier.
Considering that the U.S. housing market is valued at $32 trillion, there's no question that there's a huge opportunity in front of Redfin if it can capitalize on it and successfully disrupt the housing market.
Despite that opportunity, investors have been skeptical lately as the stock plunged 22% on its recent earnings report after CEO Glenn Kelman warned that the housing market had been cooling off in recent weeks. However, given that revenue in the quarter grew 36% and the company continued to make sizable market-share gains, increasing its share by 0.19% to 0.83%, that sell-off seems short-sighted.
Additionally, Redfin operates Redfin Now, which is essentially its home-flipping business. Though the market soured on Zillow's decision to get into home-flipping, it seems like a smart move for companies like Redfin and Zillow, which already have reams of data on the housing market, to buy and sell homes themselves.
Once again, investors seem to be underestimating the long-term potential of Redfin. The stock is now at an all-time low of around $17 following its IPO last year, and its price-to-sales ratio is just 3.6, very reasonable for a fast-growing e-commerce business like Redfin.
Based on the price and the opportunity, now looks like a great time to buy Redfin stock.
The hot little tech stock you never knew you needed
Anders Bylund (TechTarget): Cloud computing is a big tech trend these days. Online sales and marketing is another wave of the future. TechTarget puts these hot markets together by selling cloud-based services that help other companies run their digital sales and advertising campaigns. That's a strong business model, and investors are sitting up to take notice.
Share prices have run a massive 142% higher over the last 52 weeks, including a 67% gain in 2018 alone. That surge followed after a long dry spell where TechTarget's shares took a 23% haircut over the 10-year period that ended in August 2017.
The company started delivering solid and consistent earnings growth at the start of 2018, heralded by strong guidance at the end of last year. A hyper-focused portfolio of four important clients is shifting over to a broader stable of mostly smaller accounts, giving the company a more stable revenue stream while also improving profit margins. Those big clients had more pricing leverage over their deals than the incoming legion of smaller customers do.
That being said, TechTarget's results still show some lumpiness at times. The recent second-quarter report beat analyst estimates across the board but was paired with modest revenue guidance for the third quarter. Share prices plunged 18% lower on the news and have stayed there for a couple of weeks.
At the time, I thought it best to leave TechTarget alone until the company could deliver on its ambitious profit-margin goals. Having put some more thought into this feisty small-cap, I'm starting to think the margin goals are achievable thanks to the healthier customer mix. In time, TechTarget should develop some economies of scale that will help the company smooth out its lumpy sales and volatile stock charts.
So, it makes sense to take advantage of the current 18% drop as TechTarget gets its roaring full-year growth back on track.
Say aloha to this small-cap winner
Rich Duprey (Craft Brew Alliance): The craft beer industry may have slowed from its heady days of double-digit sales and volume growth, but it seems to have stabilized in a mid-single-digit range even though new breweries keep opening.
Yet Craft Brew Alliance is outpacing both the craft beer sector and the broader industry as a whole, reporting a 7% gain in depletions for its leading brand, Kona Brewing (depletions are sales to wholesalers and retailers, and the figure is considered an industry proxy for consumer demand). The Hawaii-based brew is still viewed by the beer-drinking public as a local brand, and its Big Wave brand has been making big waves in the business, with depletions soaring 22% in the latest period.
It's been helped by Craft Brew Alliance's partnership with Anheuser-Busch InBev (NYSE:BUD), which owns nearly a third of the craft brewer, disqualifying it as a true craft beer under the definition set forth by the industry trade group. The Brewers Association says to be a craft brewery, it has to produce less than 6 million barrels annually, use traditional ingredients, and be independent, which means a non-craft brewer can't own more than 25% of the brewery.
While beer drinkers themselves are more forgiving, they've still migrated toward those beers that are smaller and local, which is why there has been a rise in the number of brewpubs opening as it makes for a better connection with beer drinkers.
Craft Brew Alliance is getting better, more national distribution from Anheuser-Busch, and earnings are expected to surge 33% each year for the next five years. With strong backing from its partner and beer drinkers alike, this could be the time to catch the wave of this mass craft beer stock.