Market crash? Bring it on. Small-cap stocks have historically outperformed large-caps in periods coming out of economic recessions, and the market's recent pullback is presenting opportunities to build position in young companies that could deliver life-changing returns if held for the long term.
With that in mind, I'm concentrating my investing right now on small-cap stocks that are trading well off their highs and are positioned to benefit from market-shaping trends. I purchased shares of Zuora (ZUO 1.56%), Impinj (PI -1.83%), and Eros STX (ESGC) last month.
Here's why these three stocks have what it takes to deliver incredible returns.
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1. Zuora
Zuora is a company that provides a software platform that allows businesses to easily implement, automate, and analyze subscription-based business models. Its stock was seeing positive momentum heading into its earnings report early in September, but forward guidance that fell short of the market's expectations combined with a sharp pullback of the broader market has since sent the stock tumbling. The stock has plummeted roughly 35% since the start of September and is now down about 31% year-to-date.
Subscription-based businesses tend to be sticky in terms of customer retention, and the category has held up pretty well during the volatility created by the coronavirus and COVID-19 this year. On the other hand, the challenging economic conditions at hand and the uncertain outlook have led many enterprises to dial back on organizational shifts and spending. Companies typically aren't eager to adopt new software systems when the near-term growth outlook is unfavorable, and that's made it harder for Zuora to bring new customers onboard its platform.
Investors should take the recent pullback as an opportunity to get greedy with the stock while others are being fearful. While the S&P 500 index companies saw their revenue decline 10% year-over-year on average last quarter, companies using Zuora's platform actually increased their sales by 12% compares to the prior-year period. Customer growth should pick back up as economic conditions improve, and the business is perfectly positioned to benefit from more businesses moving online and adopting subscription-based models. That's a recipe for explosive long-term growth.
Zuora has a market capitalization of roughly $1.15 billion and is valued at roughly 3.9 times this year's expected sales.
2. Impinj
Like Zuora, Impinj is a promising technology company that's seen its growth stymied by conditions stemming from the coronavirus pandemic. The semiconductor company specializes in radio frequency identification (RFID) tags, readers, and software, and has been making most of its sales to retailers. With social-distancing initiatives resulting in temporary closures for many retail outlets and shifts in consumer behavior, it shouldn't come as much of a surprise that the business is under pressure this year.
There are a wide range of potential applications for Impinj's RFID technology, but many uses of these tags and sensors have them functioning similarly to a more advanced version of the bar-code system. The company's RFID tags are small, durable, and can transmit information without requiring a power source. They can also be updated to store new information. These features make RFID tags superior for tracking inventory and recording other data that can be analyzed to drive improved efficiency. Like bar codes, RFID technology can also be used to prevent theft and counterfeiting.
Impinj stock trades down approximately 56% from the all-time high that it hit in June 2017. Growth for the business has been slower than anticipated since the stock's peak a few years ago, and the coronavirus-related conditions haven't done the business any favors. However, I expect that demand for the company's products will eventually see dramatic growth.
Demand in the retail segment should bounce back at some point, and the potential to turn everyday items into data-transmitting objects could lead to a surge of new applications and use cases. Impinj has a market capitalization of roughly $590 million, and it trades at about 4.6 times this year's expected sales. Risk-tolerant investors should seize the opportunity to snatch up the stock at current prices.
3. Eros STX
Eros International and STX Entertainment completed their merger and began operating under the name Eros STX at the end of July. Eros is one of India's leading domestic film and television production companies, and also operates one of its largest paid-subscription streaming services. STX is a U.S.-based production company known for recent films including Hustlers, My Spy, and Martin Scorsese's The Irishman.
Eros STX stock has dipped roughly 24% this year due to coronavirus-related volatility in the broader market, concerns about widening losses and debt, and stock dilution from the creation of new shares. The company is being seriously underestimated, though, and its stock could turn into a life-changing winner for investors willing to weather some uncertainty.
The entertainment industry is one of the fastest-growing sectors of India's economy. The country has a population of nearly 1.4 billion and is on track for huge economic growth in the coming decades, and Eros STX could score big wins as the adoption of subscription streaming platforms accelerates.
Eros and STX generated over $600 million in combined revenue in 2019, and the newly merged company expects growth in its streaming business will lead to sales of roughly $1 billion in 2022. With its current market capitalization sitting at roughly $460 million, Eros STX is valued at less than half of the company's 2022 sales target. Signs of significant progress toward that revenue target could cause the stock to skyrocket over the next couple of years, and the potential for long-term growth as the Indian streaming market develops is even more intriguing.
