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3 Top Small-Cap Stocks to Buy Right Now

By Matthew Frankel, CFP® – Jul 22, 2020 at 6:04AM

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These three stocks could be home runs for patient investors.

While large mega-cap stocks tend to get the most news coverage, smaller companies can be some of the best long-term investment opportunities. Small cap stocks tend to have higher volatility than their larger counterparts, but also can have the most compelling growth potential. After all, many of the largest stocks in the market started their publicly traded lives as small caps.

With that in mind, here's why Empire State Realty Trust (ESRT 1.39%), Green Dot (GDOT -1.91%), and EPR Properties (EPR 1.88%) could be smart additions to your portfolio during Summer 2020.

Empire State building.

Image source: Getty Images.

Buy the Empire State Building at a huge discount

Empire State Realty Trust is a real estate investment trust that owns a portfolio of 14 office buildings in the New York City area, including the iconic Empire State Building.

The stock has lost about half of its value since the pandemic began, and it's not hard to understand why. Not only was New York City the early epicenter of the COVID-19 pandemic in the U.S., but New York office real estate had been in a tough market environment before the pandemic. Plus, Empire State derives a significant portion of its income from its high-margin observatory on top of the Empire State Building, and it was forced to close in March.

Having said all that, there are some good reasons to add Empire State Realty Trust to your portfolio while it's cheap. For one thing, the company has an incredibly solid balance sheet that includes $1 billion in cash. Management has indicated that it plans to capitalize on opportunities in the market, and recently hired a Chief Investment Officer for the first time ever. Second, the observatory is finally set to reopen before the end of July, and the company had just completed a massive renovation of the space. It'll be slow at first, but there's a ton of potential for high-margin revenue in the coming years. And finally, Empire State has highly desirable assets that should continue to attract high-value tenants for years – in fact, Starbucks signed a lease during the pandemic to bring a giant 23,000 square foot location to the base of the Empire State Building.

This fintech has a key advantage

When you think of fintech stocks, names like Square (NYSE: SQ) and PayPal (NASDAQ: PYPL) probably come to mind. Green Dot is a lesser-known fintech that specializes in payment technologies, but with one big advantage – unlike most of its fintech peers, it's a bank.

Green Dot's new CEO Dan Henry aims to capitalize on Green Dot's banking charter, viewing it as the key differentiator between it and the competition. In a nutshell, Green Dot can use its status as a bank to offer products and services competitors can't match – an example is the recently revamped Walmart (NYSE: WMT) MoneyCard, which now offers a connected high-yielding savings account that pays a 2% APY, which is far better than what other fintech savings platforms are offering.

In addition, Green Dot's banking charter gives it tons of potential to expand its banking as a service, or BaaS business. The simple explanation of BaaS is that many businesses want to offer banking products to their customers, but it isn't desirable for them to actually become a bank. So, Green Dot lets these companies use its infrastructure to create their own financial products. As an example, Green Dot is the company behind the Apple Pay Cash person-to-person payment platform.

This beaten-down REIT can afford to be patient

Would you want to be in the movie theater business right now? Probably not. But now could be an excellent opportunity for patient investors to do just that.

EPR Properties is a real estate investment trust that specializes in "experiential" real estate. The largest type of property it owns is movie theaters, but it also has large concentrations in waterparks, family entertainment centers, golf attractions, and ski resorts. These may sound like terrible businesses to be in right now, and that's why EPR's stock price is about 60% lower than it was before the COVID-19 pandemic hit. But there are some good reasons why it's worth a closer look as an investment.

The desire of people to get out and do things isn't going anywhere. Many of EPR's non-theater properties have reopened, and the early results indicate significant pent-up consumer demand. For example, EPR recently said that TopGolf (a major EPR tenant) reported a year-over-year increase in walk-in traffic as properties reopened.

What's more, EPR can afford to be patient. At the current rate of cash burn and its 15% rent collection rate during the shutdown months, EPR has enough liquidity to cover its expenses for more than five years. In other words, this is a REIT that can afford to patiently wait out the pandemic and capitalize on built up consumer demand on the other side.

These could be home runs for patient investors

I completely expect a turbulent ride with these three stocks, especially for the remainder of the COVID-19 pandemic. However, these are three companies with tremendous long-term growth potential and patient investors with a relatively high level of risk tolerance could be handsomely rewarded.

Matthew Frankel, CFP owns shares of Empire State Realty Trust, EPR Properties, Green Dot, and Square and has the following options: short August 2020 $105 calls on Square. The Motley Fool owns shares of and recommends Empire State Realty Trust, EPR Properties, PayPal Holdings, and Square and recommends the following options: short September 2020 $70 puts on Square and long January 2022 $75 calls on PayPal Holdings. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Green Dot Corporation Stock Quote
Green Dot Corporation
GDOT
$18.98 (-1.91%) $0.37
EPR Properties Stock Quote
EPR Properties
EPR
$35.86 (1.88%) $0.66
Empire State Realty Trust, Inc. Stock Quote
Empire State Realty Trust, Inc.
ESRT
$6.56 (1.39%) $0.09

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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