Small-cap stocks are often underfollowed, easily misunderstood, and volatile. When the broader market is falling, these smaller tickers typically fall much faster.
The Schwab Fundamental U.S. Small Company Index exchange-traded fund is trading 20% lower in 2020, amplifying a 3% drop in the broader S&P 500 index during the COVID-19 health crisis. On the upside, these drops can set investors up for huge returns if and when it turns out that the chart never should have plunged that low in the first place.
Stock photo and multimedia service Shutterstock (NYSE:SSTK) is trading 13% lower year to date. The company fell short of Wall Street's estimates in April's first-quarter report and Shutterstock canceled its full-year guidance targets due to uncertainty around the coronavirus crisis.
The pandemic is certainly changing the game for Shutterstock, but it's not all bad news. Enterprise orders are falling but sales in the e-commerce channel are on the rise as large companies explore new marketing and publishing strategies in this highly unusual market environment. Small and medium businesses, on the other hand, are stepping up their online marketing game in a big way and that's good news for Shutterstock. Seventy percent of the company's total first-quarter sales came from small and medium businesses.
And the company holds a unique position from the average consumer's point of view. Selling stock photos on platforms like Shutterstock can help you raise funds in times of economic difficulty.
Shutterstock's management expects solid financial results in the coming quarters, even if it's difficult to pin down exact guidance figures these days, and the balance sheet looks solid.
"Regardless of when we return to normal revenue volumes, I would emphasize that Shutterstock is still generating meaningful operating and free cash flows, and we do expect to do so for the remainder of the year, even absent a return to normal business volumes," CFO Jarrod Yahes said in the first-quarter earnings call. "We have a strong business model with positive cash flows and healthy balance sheet with no debt and close to $300 million of cash."
That's a healthy business with rosy long-term growth prospects, and I fully expect Shutterstock's shares to bounce back when the coronavirus crisis fades out.
SMART Global Holdings
Specialty memory module maker SMART Global Holdings (NASDAQ:SGH) has seen its shares fall 27% in 2020, even though the company delivered strong financial results in the first quarter.
The company beat Wall Street's expectations in the first quarter thanks to a successful launch of solid-state storage devices (SSD) for the networking and industrial embedded computing markets. SMART Global introduced another range of new SSD products early in the second quarter, exploring new target markets such as medical, defense, and data security devices. The company's design wins are coming in strong.
"The increase in IoT processing at the edge of the network is driving more demand for storage and we won a new customer in the area of body cameras, a market segment where we were not present before," CEO Ajay Shah said on the earnings call. "These are clearly challenging times for all of us to navigate and indeed to forecast. However, the long-term underlying business trends point toward an increasing need for more data center, cloud, and AI-related capabilities as well as greater requirements for specialized application-specific memory solutions, all of which leave us confident in our position to meet these demands in the future."
SMART Global's substantial stock price drop looks like a big mistake from this perspective.
My third small-cap idea is Paris-based online marketing expert Criteo (NASDAQ:CRTO). The company issued modest second-quarter guidance targets in April, based on the assumption that the COVID-19 crisis would drive order volumes much lower in May. Investors are also worried about an upcoming change to the handling of cookies in the popular Chrome web browser, which could make it more difficult for Criteo to collect the data it uses for building effective online marketing campaigns. As of this Tuesday evening, Criteo's stock had fallen 36% year to date.
Criteo updated its second-quarter outlook on Wednesday, and it turned out that the expected revenue crash never happened. The announcement drove Criteo's stock 19% higher in a single day and also sparked double-digit jumps for fellow digital marketing experts The Trade Desk (NASDAQ:TTD) and The Rubicon Project (NASDAQ:MGNI).
This sudden correction did not signal the closing of Criteo's wide-open investment window. The stock is still down 24% in 2020, trading at just 9.8 times trailing earnings or four times free cash flows. The company also reports steady profits and the balance sheet holds more cash than debt. Regarding that troublesome Chrome update, Criteo is actively discussing the issue with browser builder Alphabet while exploring workarounds based on data-tracking ideas that don't rely on browser cookies.
I'll admit that the Chrome issue could become a short-term problem, but I also expect Criteo to meet its data-tracking requirements in other ways.
"We believe the industry is long overdue in replacing cookies as the technique used to personalize ad targeting on the web, and we welcome concerted industry efforts to evolve beyond cookies in privacy-safe ways," Criteo CEO Megan Clarken said in the company's fourth-quarter earnings call. "We're very well positioned for this shift."
All things considered, Criteo's stock is spring-loaded for a fantastic rebound. The stock may still fall a bit further if and when the Chrome browser limits the sharing of cookie data, but that's just another deep-discount buying opportunity in the making.