The economy is still reeling from the coronavirus pandemic and the economic lockdowns to halt its spread. But the stock market has rallied, and as measured by the S&P 500, is a mere 7% from where it started 2020. What gives?

It's true that the market may have run far ahead of the current economy, but markets are chiefly concerned with the future and are anticipating conditions will mend sooner than later. Additionally, we live in disruptive times, and a new set of digital-based businesses is quickly growing in importance -- if not overtaking old incumbent business operations.

Paired with optimism around an eventual economic rebound, I've been scouring stocks for small companies that play in big industries, have long runways for growth in the next decade, and are still going largely unnoticed. Three stocks I plan to purchase in the next month are LiveRamp Holdings (RAMP -0.31%), Limelight Networks (EGIO -22.72%), and REPAY Holdings (RPAY -1.78%). These three companies are imperfect, as are most small businesses, but they have lots of potential.

A neutral third-party to data

LiveRamp hit my radar thanks to fellow contributor John Quast, but after doing some digging for a couple weeks, it's moved onto my nibble list. The company acts as a third-party customer data intermediary to help advertisers make better decisions and increase the likelihood a purchase is made. You can read more about the ins and outs of how it works here

LiveRamp checks all my boxes for a small cap stock investment. It has a large and growing market in digital advertising, which is still just barely over half the global ad-spend total but growing at a low-teens percentage rate. Its gross margins are on the rise, increasing to 65.1% during the quarter ended March 31, 2020 (compared to 51.8% a year ago). It's investing heavily to promote growth, so free cash flow (revenue less cash operating and capital expenses) was negative $40.5 million in the last year, excluding the $105 million it paid in cash acquisition costs to purchase connected TV company Data Plus Math. But cash and equivalents were $718 million with no accompanying debt at the end of March.

The biggest risk I see here is that many of LiveRamp's customers rely on brick-and-mortar businesses that may be struggling due to COVID-19 lockdowns. As a result, the company's guidance for the current quarter ending in June 2020 called for only 7% year-over-year revenue growth. However, that uncertainty seems priced in as the stock trades for just 7.6 times trailing 12-month sales. I have my eye on taking a small position in this company.  

Two people sitting on a couch watching TV.

Image source: Getty Images.

An underappreciated content delivery network

Content delivery networks (CDNs), the infrastructure companies that ensure data and services requested via the internet arrive at their intended locations, have been in the spotlight this year. After watching it since its IPO in 2019, I bought fast-growing upstart Fastly (FSLY -3.81%) in May, just in time for the stock to go nuts as e-commerce has gotten a big boost amid shelter-in-place orders. I'm ready to start purchasing another small CDN I've been keeping an eye on: Limelight Networks. 

As I wrote in late April, Limelight has lived up to its name by helping Disney hit the ground running late last year with Disney+. Comcast's Peacock, available now for current customers and getting a nationwide rollout in July, is also making use of this small CDN. While Fastly has garnered attention from e-commerce, Limelight is making similar waves in the growing field of streaming TV.

According to the small tech company's research, online video streaming (from video conferencing to live news streams to virtual workouts) has increased four-fold from six months ago. Besides the migration to connected TV potentially equating to big gains in revenue, Limelight had zero debt and $21.4 million in cash on its books at the end of March 2020. It's a little slim, but the company did run free cash flow positive ($2.71 million) to kick off the new year. And though the stock is up over 180% in the last 12 months, it still trades for just 4.1 times trailing one-year sales -- compared with 31.4 times sales at Fastly. Though its larger peer is expecting more growth and is flush with cash, the disparity in valuation looks overdone to me.

Assessed on its own merits, though, I like Limelight's focus on delivering internet-based video. With consumer behavior becoming altered (perhaps permanently) by the effects of the coronavirus pandemic, this could be a long-term winner as the world increasingly relies on the internet for communication and entertainment.

Bringing real-time digital payments to traditional cash transactions

Finally there's REPAY, which has also been getting a boost from the economic lockdown. I took a small starter position (less than one-half of a percent of my portfolio) back in May around the same time I bought Fastly, and it's up over 40% since then. In spite of the big run-up, I'm ready to purchase some more.

REPAY provides real-time electronic payment services geared toward industries that still rely on cash, check, and legacy electronic payment systems like ACH (which isn't a real-time transaction). Auto and home loan servicing, business-to-business sales, and credit unions are some top customers making use of REPAY's platform. While digital payments are commonplace for consumers, comprising over $1 trillion a year in payment volume, these industries have historically made little use of the technology. The opportunity to tap into these markets while businesses figure out how to accept payments other than cash and check during the pandemic could be a huge opportunity for REPAY. The company processed just $3.8 billion in transactions in the first quarter of 2020.  

The biggest risk I see with REPAY is its indebtedness, totaling $241 million in cash and equivalents, ringing up to just $32.7 million at the end of March. However, the company is addressing this, recently announcing the sale of new stock and the redemption of outstanding warrants -- with both events set to raise new liquidity. It dilutes existing shareholders, but strengthening the balance sheet so it can pursue its expansion plans is an important step.

In the meantime, this small digital payments stock goes for 9.8 times the last year's worth of revenue, although it's lapping several acquisitions it has made in that time period. But with an enterprise value of just $1.8 billion, I like the potential for growth in the next few years and will look to add a few more shares to my small position this summer.