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3 Top Small-Cap Stocks to Buy Right Now

By Will Healy - Sep 4, 2020 at 7:45AM

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These stocks may not remain small caps for long.

Investors continue to show a fascination with small-cap stocks.

Defined as stocks with a market capitalization in the $300 million to $2 billion range, most small caps remain inconsequential as they exhibit no apparent potential for profit growth or industry leadership. However, many buy in hopes that the small-cap stock of today is the large or mega-cap stock of tomorrow.

While no company or investment guru can guarantee this, Glu Mobile (GLUU), NeoPhotonics (NPTN 0.06%), and Purple Innovation (PRPL -2.56%) are exhibiting characteristics that suggest they offer such potential. Let's take a closer look at these three top small-cap stocks.

1. Glu Mobile

Glu Mobile began as a mobile phone company in 2001, well before the advent of the smartphone. Nonetheless, gaming on mobile devices is where the company found its success (its first game for smartphones was Asteroids in 2007). Games such as Design Home, Kim Kardashian: Hollywood, and MLB Tap Sports Baseball put the company on the map.

The word "small cap" written on a sheet of paper on a clipboard amid a table full of charts.

Image source: Getty Images.

Today, with a market cap of around $1.4 billion, it has established itself as one of the primary mobile device gaming companies. The success enjoyed in this niche by both Glu Mobile and Zynga has forced established gaming companies such as Activision Blizzard to focus more on mobile gaming.

Amid the COVID-19 pandemic and the rise in unemployment, interest in gaming spiked. It is unclear whether this fueled interest in Glu Mobile stock. Still, its stock price has risen by more than 30% since the beginning of the year.

GLUU Chart

GLUU data by YCharts

Also, despite its potential, Glu Mobile trades at a forward P/E ratio of around 18. The company lost $0.05 per share in the latest quarter. However, revenue rose by 40%, while bookings increased by 79% from year-ago levels. Given this growth level, Glu Mobile may not remain a small cap for very long.

2. NeoPhotonics

The optoelectronic products of NeoPhotonics play a critical role in transmitting digital signals and internet content over telecom networks. The company continues to build a growth niche in data centers as demand rises for its 64-gigabaud products and 400-gigabit and above applications.

To be sure, the fact that its largest customer is China-based Huawei may deter some investors. However, the company recently revealed that its non-Huawei revenue should increase by 40% to 50% over the next year. This increased diversification should help NeoPhotonics stock, which supports a market cap of just under $350 million, move higher.

Admittedly, challenges remain. NeoPhotonics stock has remained rangebound for the last nine years. Investors also punished the stock after its previous report issued underwhelming guidance. Even at just under 16 times forward earnings, such stagnation will probably not inspire buyers.

NPTN Chart

NPTN data by YCharts

However, analysts forecast that profits will surge well past the breakeven range. As the company diversifies away from Huawei, investors could finally grow more confident about NeoPhotonics stock.

3. Purple Innovation

Purple Innovation sells technically advanced mattresses, pillows, and other comfort products. It uses a proprietary product described as a "Hyper-Elastic Polymer technology" to achieve this comfort.

Consumers have taken to these products even amid the pandemic. Net revenue for the most recent quarter increased by more than 60%. Although the company experienced a loss of $0.07 per diluted share for the quarter, earnings remain positive for the year. Moreover, since non-cash charges led to the loss, the cash level still increased to $95.4 million during the quarter.

At a forward P/E ratio of just over 31, the stock is not cheap. Nonetheless, analysts expect earnings for the fiscal year to surge to $0.75 per share amid a 47% revenue increase.

Additionally, the real benefit may come from the stock itself. Thanks to its surge following the March lows, Purple Innovation stock has more than doubled since the beginning of the year. This has taken the market cap to around $965 million as of the time of this writing.

PRPL Chart

PRPL data by YCharts

Assuming such growth continues, the stock price growth could easily continue to follow. Such increases could leave investors resting as comfortably as Purple Innovation's customers.

Will Healy has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Activision Blizzard and Zynga and recommends the following options: long January 2022 $75 calls on Activision Blizzard and short January 2022 $75 puts on Activision Blizzard. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Glu Mobile Stock Quote
Glu Mobile
NeoPhotonics Corporation Stock Quote
NeoPhotonics Corporation
$16.01 (0.06%) $0.01
Purple Innovation, Inc. Stock Quote
Purple Innovation, Inc.
$3.80 (-2.56%) $0.10

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

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