There's no single factor that determines whether a company with a small market cap will eventually grow enough to join the ranks of the largest stocks. But there are a few inklings that investors can look for which can indicate that a stock has a lot of growth in its future. Specifically, profitable companies that are sustainably growing their revenues and extracting increasing cash flows from their investments over time are more likely to have what it takes to expand massively in the long term.
Each of the three companies I'll discuss today is competing profitably in the healthcare sector, and each is also exhibiting a robust return on invested capital (ROIC) as well as consistently rising revenues over time. In other words, these companies are effective at turning their capital into new revenue by choosing the right projects and executing them effectively in their market. There's no guarantee that these stocks will become large enough to be in the big leagues, but they all have a solid shot, and investors should take note.
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Innoviva
Innoviva (INVA 0.49%) purchases the rights to royalties from sales of inhaled respiratory drugs for conditions including seasonal allergies and asthma. Because the company has no need to sell or develop products, its operating expenses are practically nil, and it has no direct competitors. Innoviva's profit margin is an eye-popping 76%, putting it above and beyond most biotech companies. Likewise, its ROIC of 31% is the highest of the stocks I'll discuss today, as is its year-over-year quarterly earnings growth of 104%.
With a market cap of $1.1 billion, Innoviva needs its capitalization to grow by slightly less than $9 billion before it becomes a large-cap stock. As long as Innoviva keeps its operating expenses low, every dollar it makes is another dollar that can go toward its next asset purchase. Many of the royalties presently held by Innoviva extend into the late 2020s, meaning that the company doesn't need to do much of anything to keep its revenues rolling in at the current level. Of course, between now and then, the company will almost certainly reinvest its earnings to add new royalty holdings to its portfolio, thereby increasing its long-term value for shareholders and adding to its market capitalization.
Supernus Pharmaceuticals
Supernus Pharmaceuticals (SUPN -1.87%) is a scrappy biotech company with a market cap of just more than $1 billion that makes novel drugs to compete in several different neurology markets. At present, Supernus has five approved drugs, which have provided it with $424 million in trailing 12-month revenues. That revenue is growing at 21% year over year, but this growth may accelerate because the company will soon secure regulatory authorization to commercialize one of its pipeline programs for attention deficit hyperactivity disorder (ADHD).
Like Innoviva, Supernus needs to grow its market cap by about $9 billion before it reaches large-cap status. The company's road to becoming a large cap will stem from its favorable fundamentals, which will need to be maintained over the next few years at a minimum. Supernus's profit margin is 28%, and its ROIC is a formidable 12.6%. Both of these factors indicate that as Supernus continues to grow its revenues, the company's management will ensure that the proceeds are invested fruitfully and efficiently for long-term growth. This is especially important for a company at Supernus's stage because it won't need to take on debt to continue expanding into its markets.
Addus HomeCare
With a market capitalization of $1.4 billion, Addus HomeCare (ADUS 0.27%) provides nursing and hospice care support for elderly people who would otherwise need to be taken care of in a nursing home or hospital. While its profit margin is narrow at 4.2% and its ROIC is a mere 6.1%, the company is growing its quarterly earnings at a rapid rate of 30.5% year over year, and it seeks to grow its revenues by at least 10% per year. The most important thing to realize about Addus is that its growth is sustainable -- the company has been in business for more than 40 years, and it currently employs more than 33,000 people across the U.S.
As long as people continue to grow old and need care, Addus will be able to expand its business, making it a significantly more reliable stock than many others in the healthcare sector. This means that the company can most likely become a large cap by continuing with its business as usual -- a highly favorable state of affairs for cautious investors. From 2015 to 2019, the company boasted a compound annual growth rate of 18.9%. In 2020, it reached $736 million in trailing revenues. What's more, Addus expects that demographic trends in the U.S. will heavily favor its expansion, with its target customer numbers doubling between now and 2050. While it may not be a competitor in a hot market, Addus is on track to become a monster stock one year at a time.
