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2 Small Stocks With Big-Cap Potential

By Matthew Frankel, CFP® - Updated Mar 27, 2020 at 7:00AM

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These companies might not be small for much longer.

Smaller companies can be exciting to invest in. While they tend to be a bit more volatile than the overall market, they can also have tremendous long-term growth potential. While most megacap stocks couldn't reasonably grow to several times their current size in just a few years, it's certainly possible with many smaller companies.

With that, here's why I think Wayfair (W 6.36%) and Stitch Fix (SFIX 2.22%) could grow to many times their current sizes and aren't likely to remain small stocks for much longer.

Man and woman shopping online with a credit card in hand and laptop in front of them

Image source: Getty Images.

A new approach to selling household goods

On one hand, online furniture and home goods retailer Wayfair could benefit from the fact that people are choosing to stay home and avoid shopping in stores (if the stores are even open). On the other hand, during times of financial uncertainty, many people are likely to cut back on discretionary purchases, so it's fair to assume that this could outweigh the online-only positives, especially given the U.S. recession is looking like it will be longer and deeper than originally thought.

Even so, Wayfair has lost a staggering 40% of its value since the beginning of 2020. While it was recently firmly in the realm of mid-cap companies, Wayfair is not far from small-cap territory right now with a $5 billion market cap.

To put it mildly, I think the stock's downward spiral has gone too far. Sure, the business will suffer in the short term. 2020 is likely to be a terrible year for Wayfair. However, the company doesn't have a physical store presence to worry about, unlike most of its rivals, and its recent results have been impressive. In 2019, Wayfair had 20.3 million active customers and generated over $9 billion in revenue. 2020 might be somewhat of a pause, but I don't foresee Wayfair's customer base ditching the platform when the dust settles.

An e-commerce company that could come out of the crisis even stronger

Stitch Fix is one of the few stocks in the market that has been beaten down for reasons other than the coronavirus pandemic. The company's stock lost about a third of its value after it reported earnings on March 9, before the market downturn was anywhere near its current magnitude.

On the surface, Stitch Fix's numbers looked strong. Revenue grew 22% year over year and the company posted a profit. There are now 3.5 million active clients on its platform, which is 17% higher than the prior-year quarter. The problem is that the company cut its full-year revenue outlook and wasn't expecting as much growth as investors were hoping for. And that was before the coronavirus pandemic was factored in.

Even so, Stitch Fix didn't deserve the 40% drop in its stock price that has taken place. While the company will certainly feel the sting of a recession, it is financially stable and well managed, and has a tremendous growth runway in the massive apparel industry.

It won't happen overnight

Both of these companies could certainly grow to several times their current size, but it isn't likely to happen quickly. And it's certainly possible that they could fall even more in the short run, especially if the coronavirus pandemic -- or the resulting economic fallout -- lasts longer than anticipated. So, approach these (and pretty much all other stocks in the market) with a long-term outlook and brace yourself for quite a roller-coaster ride for at least the next few months.

Matthew Frankel, CFP owns shares of Stitch Fix. The Motley Fool owns shares of and recommends Stitch Fix and Wayfair. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Wayfair Inc. Stock Quote
Wayfair Inc.
$68.62 (6.36%) $4.10
StitchFix Stock Quote
$7.36 (2.22%) $0.16

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