Small-cap stocks are taking the COVID-19 crisis harder than their larger cousins. The Schwab Fundamental U.S. Small Company Index exchange-traded fund is trading 17% lower in 2020, but the broader S&P 500 index rose 5% over the same period. On the upside, these drops can set investors up for strong returns if and when small-cap businesses make full recoveries.
Online insurance marketplace EverQuote (EVER -6.32%), digital identity verification expert Mitek Systems (MITK -1.71%), and household robotics specialist iRobot (IRBT -4.07%) are three small-cap tickers that appear spring-loaded for strong returns right now.
EverQuote's business is mostly in the car insurance market, which accounted for 82.5% of the company's total revenues in the second quarter. That's changing in a hurry, though. Auto insurance revenues grew a healthy 30% year over year, but other insurance revenues collectively rose by 133% over the same period. Throwing more fuel on those growth fires, EverQuote just acquired health insurance agency Crosspointe in order to bolster the company's product portfolio in the healthcare sector.
The company is also building deeper partnerships with actual insurance carriers. A more integrated insurance quote platform will result in more satisfied customers, which, in turn, will drive word-of-mouth marketing and steady flows of returning customers.
EverQuote is growing quickly today and building an even stronger, more mature framework for continued success. Their market cap weighs in at just $1.1 billion, based on trailing sales of $301 million and $13 million of free cash flows. Sales have grown at an annual clip of 32% over the last five years, and that's just the beginning of a long-term growth story.
When the digital economy is booming, Mitek comes along for the ride. The company is a leader in mobile check deposit technologies and related digital identification systems.
I hardly need to tell you that e-commerce and online banking have become huge buzzwords in 2020, but you might not have noticed that Mitek Systems is crushing expectations this year. It's easy to fly under the radar with a market cap of just $500 million and trailing sales of only $96 million.
Mitek's third-quarter sales jumped 16% higher year over year to $25.4 million. Earnings rose 33% to $0.16 per share. Your average analyst would have settled for earnings near $0.10 per share on revenues in the neighborhood of $23 million.
This stock has gained 31% over the last 52 weeks, but Mitek still looks cheap. Its shares are changing hands at 22 times free cash flows and 20 times forward earnings. Those are bargain-bin discount ratios for a company that grew sales by an average annual rate of 35% over the last five years.
Consumers everywhere found themselves stuck at home for several months this spring and early summer. They looked around and decided to clean up their homes like never before, driving fantastic sales of iRobot's Roomba vacuums and Brava mopping robots. Sales rose 8% year over year, but the stock fell anyway because the company expects lower profit margins in the second half of 2020 and early 2021. Import tariffs may come back to bite the company again next year, as its extended immunity to these fees is set to expire in January. iRobot is working around the issue by building production facilities in Malaysia, but these factories won't be ready to take over the company's Chinese manufacturing flow until mid-2021 or later.
So iRobot's stock price dropped due to a short-term margin issue, even though the company absolutely crushed Wall Street's expectations. In my view, that reaction opened a great buying window for iRobot stock.
This company stretches the definition of small-cap stocks a tiny bit with a $2.2 billion market cap -- but cut me some slack here. I just couldn't help it. iRobot is a fantastic company, and I get downright excited at the prospect of recommending it to you, dear reader. The cap sat below the magic-but-arbitrary $2 billion mark as recently as August, anyway. No big deal.