If the past few weeks of rocked stocks didn't scare you away, there's a good chance you're diving into April with an appetite for opportunistic purchases. There are plenty of small-cap stocks that worthy of your attention this month.
Fitbit (FIT) and SmileDirectClub (SDC -75.00%) are some of the stocks with current market caps below $2 billion with the potential to move higher. They may not be popular names for investors now, but Fitbit's unique win-win situation and SmileDirectClub's status as a turnaround candidate make them stocks to watch in April.
Image source: Fitbit.
Fitbit
Singling out a stock that's supposed to be acquired later this year may seem like an odd fit on a list of hot stocks, but let's call Fitbit -- still waiting for Alphabet (GOOG 1.16%) (GOOGL 1.13%) to close on its $2.1 billion deal for the wearables pioneer -- a hedge against volatility. As bad as 2020 has been, Fitbit is one of the handful of stocks that have inched higher as it eats into the wide discount to its takeout price. If April is rough, Fitbit should continue to beat the market.
Fitbit is trading for quite a bit less than the $7.35 a share in cash that Alphabet's Google is set to pay this year for the fitness-monitoring specialist. But there are concerns that regulators will nix the deal. In particular, Fitbit collects health and fitness data, and Alphabet is a tech giant with the potential to misuse that information.
This deal can go either way, but let's go over why I think Fitbit investors will win either way. The government has bigger fish to fry at this point, and Google is already positioning itself as an ally to the country's recovery efforts -- including announcing $800 million in aid for small businesses. If the deal does go through this year, Fitbit investors will see their shares appreciate nearly 15% to hit the buyout price, and that's a good haul in any market.
Now let's talk about the real possibility that this deal falls apart. What is Fitbit worth in this scenario? Fitbit's market cap of $1.7 billion is backed by a cash-rich balance sheet. Its enterprise value is less than $1.3 billion right now, and if Alphabet can't complete its deal for Fitbit, it will cut a $250 million check. The unusually high termination fee was negotiated because both sides knew the deal was going to be a challenge, so we're talking about an enterprise value for Fitbit closer to $1 billion if the deal flops.
Fitbit isn't perfect, but it's still growing its user base. It sold 8% more devices in its latest quarter than it did a year earlier, and there are now nearly 30 million active users on Fitbit's digital health platform. Revenue declined as the product mix shifted to cheaper offerings -- and cash burn is a concern -- but Fitbit on its own seems to be worth more than $1 billion in enterprise value. The stock may initially take a hit if the deal comes undone, but eventually investors will appreciate Fitbit's access to a huge audience on its digital platform and a smaller side business of health solutions that's growing at a double-digit percentage rate.
SmileDirectClub
One of last year's more disappointing IPOs is a company that sells clear dental aligners at a steep discount to braces or comparable aligners available through dentists and orthodontists. The direct seller of corrective dentistry products didn't have a problem drumming up demand before the COVID-19 crisis. Revenue soared 53% in its latest quarter, but reports of negative customer reviews, a lack of profitability given the high marketing costs, and the shutdown of its SmileShops through at least May 3 for the sake of coronavirus containment have crushed the stock. SmileDirectClub enters the weekend 83% below the $23 IPO it completed seven months ago.
It hasn't been a straight trip down for SmileDirectClub. A few weeks into 2020, it was one of this year's hottest stocks after the company announced a distribution deal with the country's largest retailer and the end of an exclusive supplier agreement that would broaden its ability to market directly to the dental industry. Times have changed, and even shifting some of its 3D printing functionality to making protective face shields for medical professionals is more of a feelgood story than a practical solution to what's currently ailing SmileDirectClub.
SmileDirectClub still makes the cut as a bounce-back candidate for April. Straightening your teeth is probably the last thing on your mind right now, but when the crisis is over you're probably going to be even more conscious about finding the most economical way to make that happen. SmileDirectClub, with its teledentistry angle and consumer-direct model, will thrive in that environment. SmileDirectClub is a cautionary tale on the risks of investing in IPOs, but every dog has its day when the business makes sense.
