It's good to be a small-cap stock. According to data released in August 2018 by S&P Dow Jones Indices, small-cap stocks were outperforming large-cap stocks by more than 10% over the then-trailing four-month period. Although small-cap stocks are traditionally riskier investments that lack time-tested business models, they can, if given time, substantially outperform mid- and large-cap companies over the long run.
With this in mind, we asked three of our contributors to name the one small-cap stock they believe investors should consider scooping up right now. Topping the list were Florida-focused medical marijuana company Liberty Health Sciences (LHSIF), financial accounting solutions provider Blackline (BL -2.49%), and generic and branded drug developer ANI Pharmaceuticals (ANIP -1.07%).
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The numbers add up for this marijuana stock
Keith Speights (Liberty Health Sciences): If you're the kind of investor who likes numbers, you'll probably really like Liberty Health Sciences. The first important number to know is 14. That's how many medical marijuana licenses there are in the state of Florida -- and Liberty holds one of them.
Florida's limited-license market means that Liberty Health Sciences doesn't have a huge number of competitors. And that leads us to the second number to know: 15%. Liberty's current market share is around 15%, according to the company's CEO, George Scorcis.
However, Scorcis thinks the company will boost its market share to 25% --- there's another number to keep in mind. Liberty is dramatically increasing its production capacity, with a major retrofitting project scheduled to wrap up in early 2019. It's also adding seven more dispensaries to the four it currently has. Florida allows a license holder to operate up to 30 dispensaries.
One other number you should know that really underscores the attractiveness of this stock is $1.7 billion -- the total medical marijuana sales for Florida in 2022 projected by Arcview Market Research and BDS Analytics. If Liberty can capture just 20% of the market -- less than what Scorcis expects -- the company should generate annual sales of $340 million.
Liberty's current market cap of around $335 million gives it a lot of room to run as Florida's medical marijuana market grows. The numbers add up nicely for this small-cap stock.
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Take advantage of the SaaS sell-off
Brian Feroldi (Blackline): Software-as-a-Service (SaaS) investors have enjoyed huge gains over the last decade, but the last few weeks have been brutal. Wall Street has turned sour on scores of stocks that make their money in the cloud, which is providing investors with a great chance to get in.
One of my favorite SaaS stocks is a little-known business called Blackline. This founder-led company automates a lot of labor-intensive accounting processes with software that is hosted in the cloud. Blackline has already convinced thousands of companies to sign up.
For investors, the beauty of Blackline's business model is that the vast majority of revenue is earned through recurring subscription fees. That fact makes its financial statements highly predictable. What's more, Blackline continues to convince its current customers to spend more -- its dollar-based net revenue retention rate was 109% in the most recent quarter -- as it continues to win new business. The combination added up to 29% revenue growth in the most recent quarter. The company is also finally big enough to start driving free cash flow and non-GAAP net income, too.
The management team estimates that its current market exceeds $18 billion, which is a big number when compared to the $227 million that it is estimated to pull in this year. When combined with the natural operating leverage of the business, it is understandable why analysts are predicting triple-digit growth on the bottom line over the next five years (albeit from a very small base).
While Blackline's future looks very bright, traders have knocked down the share price by nearly a third from its recent high. I think the sudden discount is providing investors with a great chance to get in.
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There's nothing generic about a double-digit growth rate
Sean Williams (ANI Pharmaceuticals): Personally, I love fishing around for small-cap opportunities, because once in a while you come across a true gem, like ANI Pharmaceuticals.
ANI Pharmaceuticals is a hybrid drug developer that produces generic and branded therapies, and, to a lesser extent, handles contract manufacturing and generates some income from royalties. It's definitely a company that appears to have strength in numbers. Back in 2014, it had just 10 commercial products on the market and produced $56 million in annual sales. As of ANI's most recent quarterly report, it had 42 approved products, 31 of which are generic, and was on track for a midpoint of $200 million in annual sales in 2018. And, as investors love to see, adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) has risen in step with revenue each year.
Innovation and acquisitions continue to be ANI Pharmaceuticals' biggest growth drivers. In addition to developing branded therapies and expanding the labels of existing medicines, ANI aims to purchase and recommercialize previously approved therapies. Because of this, its generic drug pipeline consists of nearly six dozen generic medicines, which, when combined with its 31 commercial generic products, reaches an annual market size of $3.3 billion.
Surprisingly, though, ANI Pharmaceuticals' share price has fallen more than 20% over the trailing year. This, in all likelihood, probably has to do with general weakness in generic-drug pricing that appears to already be subsiding. Looking ahead, however, ANI has a real chance to grow its earnings per share by 10% to 15% per year through 2021. With a forward P/E ratio that's already less than 10, and PEG ratio that's well below 1, ANI Pharmaceuticals looks ripe for the picking.
