Small-cap stocks can be a great hunting ground for investors, because these businesses are less well known and often have lots of growth runway ahead of them.
We asked a team of Motley Fool contributors to each highlight a small-cap stock that they think is a great buy right now. Here's why they called out Keane Group (NYSE:FRAC), Charlotte's Web (NASDAQOTH:CWBHF), and Tucows (NASDAQ:TCX).
A picks-and-shovels play for today's modern energy rush
Chuck Saletta (Keane Group): No technology has done more to unleash America's energy resources in the past few years than hydraulic fracturing has. Indeed, it is widely credited for enabling the United States to become a top energy producer worldwide and for the country achieving net energy independence.
From a producer's perspective, one of the biggest challenges with hydraulic fracturing is that wells tend to go into decline fairly quickly, requiring more drilling to maintain or increase overall energy output. However, the short lifespan of typical wells can be music to Keane Group's ears. Keane Group focuses on providing services throughout the lifespan of hydraulic fracturing wells, so the more drills are needed, the better the company's potential to profit.
Like any company involved in energy production, Keane Group is exposed to the cyclicality in energy prices. As a result, maintaining a healthy balance sheet is important to assure the company's long-term success. With a debt-to-equity ratio around 0.9 and a current ratio around 1.5, Keane Group's balance sheet looks solid enough to enable it to ride through the ups and downs of a typical cyclical swing.
From a geopolitical perspective, as tensions in the Middle East roar back up, the price of oil is rising in response. While nobody really wants war, history suggests that rising oil prices will eventually lead to more drilling, and thus more demand for Keane Group's services. Despite that combination of potentially bullish factors, Keane Group's shares recently touched all-time lows, making now a tempting time to consider investing.
The smartest medical cannabis play of all
Sean Williams (Charlotte's Web): As someone who's followed the cannabis industry like a hawk for the better part of the past six years, I can think of few small-cap stocks that look more attractive than Charlotte's Web.
Of course, Charlotte's Web isn't just your typical marijuana stock. It's actually a play on the rise of cannabidiol (CBD), the nonpsychoactive cannabinoid best known for its perceived medical benefits. In layman's terms, it won't get you high, and it may treat a variety of medical conditions, ranging from pain to anxiety.
Already generating plenty of buzz prior to December, the outlook for CBD sales growth really took off after Congress passed and President Trump signed the farm bill. This bill legalized the industrial production of hemp, as well as hemp-derived CBD. This is important given that while CBD can be extracted from cannabis, hemp is considerably easier and cheaper to grow, and it's often rich in CBD with minimal tetrahydrocannabinol (THC), the cannabinoid that gets users high.
Last year, Charlotte's Web wound up planting 300 acres of hemp that allowed for the extraction of CBD from 675,000 pounds of hemp biomass. Recently, the company announced that it would increase its planted acreage by 187% to 862 acres in 2019 in order to take advantage of the incredible demand in the U.S. for CBD products. And in case I've failed to mention it, compound annual growth through 2022 for U.S. CBD products could be as high as 147%, per the Brightfield Group.
Having ended 2018 with a presence in 3,680 retail outlets, Charlotte's Web increased its shelf space to more than 6,000 retail spots by the end of March. Its strong branding and increasing harvest are a big reason it has one of the highest shares of the hemp-derived CBD market in the United States.
More important, Charlotte's Web is one of the very few cannabis-related stocks to be profitable on an operating basis (i.e., without the assistance of fair-value adjustments on biological assets or one-time benefits). Currently forecast by Wall Street to nearly double sales in 2019 to $137 million then increase revenue by 135% in 2020 to $323 million, yet valued at less than 19 times 2020's earnings per share, Charlotte's Web and its $1.3 billion market cap look to be a bargain.
Look beyond big telecom
Brian Feroldi (Tucows): Ask the average consumer to name a wireless provider and they'll probably say Verizon, AT&T,or T-Mobile. That's because the big wireless providers spend lavishly on marketing campaigns to make sure that their names are always top of mind with consumers. However, alternative providers like Tucows often provide a better service for a cheaper price. That gives them a tremendous opportunity to capture market share as consumers learn that alternatives exist.
Tucows operates a wireless service called Ting Mobile. This business offers a pay-as-you-use-it model that enables customers to save a bundle on their wireless bill. The average Ting Mobile user pays just $23 per month for their service. Ting's customers service is second to none, too. Customers who call are connected to a human without having to go through a frustrating phone tree. These benefits should help the company continue grabbing market share in the U.S.
There's more to Tucows than just Ting Mobile, too. The company has two other businesses in its fold that are poised for long-term growth.
The first is its internet-domain registration service. Tucows has been in this business for years and is one of the largest providers in the world. This is a steady-eddy cash cow business that pumps out consistent profits.
The second is a newer business called Ting Internet, which is a fiber internet business. The company wants to disrupt the home internet market in the same way that it is disrupting mobile. By offering attractive prices and a superior customer experience, this business should continue to take market share for years to come.
In total, Tucows offers investors three attractive businesses that are all poised for long-term growth. That should be music to any small-cap investor's ears.