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3 Top Small-Cap Stocks to Buy in January

By Jim Halley - Jan 6, 2021 at 7:49AM

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These three small-cap stocks all turned a profit last quarter and present ample growth potential at bargain prices.

It's easier to find bargains in the stock market if you look at high-quality small-cap stocks because not many investors have an appetite for these lesser known names. For perspective, the Russell 2000, an index tracking small-cap stocks, rose 18.4% in 2020, outperforming the S&P 500 by more than two percentage points. 

You may not be that familiar with Zynex Medical ( ZYXI -1.95% ), Regenxbio ( RGNX 5.25% ), and Koppers Holdings ( KOP 3.33% ), but all three present solid investment opportunities.

Businesswoman celebrating at her desk.

Image source: Getty Images. 

1. Zynex Medical has plenty of growth ahead

There's one really good reason to like Zynex Medical -- strong revenue growth. From 2016 to 2019, the medical devices company increased revenue 242%, or 51% annually. For 2020, management expects sales ranging between $80 million and $81 million, a rise somewhere in the neighborhood of 77% over the $45.5 million the company posted in 2019.

Zynex manufactures electrotherapy devices for pain management, rehabilitative purposes, neurological diagnoses, and cardiac monitoring. While the stock is up more than 71% over the past 12 months, it has dropped 25% in the last three months and wasn't helped by a third-quarter earnings miss by 23%.

With a price-to-earnings (P/E) ratio of 46, it's easy to see how some may think the stock is overpriced, but I think that's shortsighted. It's not just a growth stock, but one that has been profitable for 17 consecutive quarters. A few months ago, the stock may have been overpriced, but now it's much more in line with the typical P/E of a medical devices company.

I think a lot of people panicked and sold the stock when its third-quarter net income came in at $1.3 million, down 34% from the year-ago quarter. As clinics remained shut due to the COVID-19 pandemic, the company increased its sales force headcount drastically, and that drove up marketing costs in order to maintain revenue growth. This strategy, however, seems like a temporary fix, and sales and marketing costs should go down as clinics resume normal operations. 

Nearly all medical device companies faced headwinds last year during the pandemic because fewer medical procedures were performed. I think the company's focus on nonopioid, nonaddictive pain management will serve it well in the future.

ZYXI Chart
Data source: YCharts.

2. Breakthrough procedures have the market excited about Regenxbio

Shares in Regenxbio, a clinical-stage biotech company specializing in gene therapies, nearly 11% over the past year and almost 60% in the past three months. The company has a strong pipeline, and its proprietary gene delivery platform -- the NAV technology platform -- has already helped bring one major drug to market, Novartis' Zolgensma. The one-time gene therapy treats pediatric spinal muscular atrophy and goes for $2.1 million a dose, making it the most expensive drug in the world.

In the third quarter, Regenxbio reported revenue of $98.6 million, an increase of 572% year over year, but that's a misleading -- $80 million of that was from a one-time milestone payment from Novartis regarding Zolgensma. Still, Regenxbio is a rarity in that it is a clinical-stage biotech company that reported a profit of $9 million last quarter.

What's exciting about the company is it has a great late-stage eye disease candidate. RGX-314 is in phase 2 trials to treat wet age-related macular degeneration and diabetic retinopathy, the leading cause of vision loss for diabetics. RGX-314 uses an adeno-associated virus as a vector, or delivery method, to send a protein that fights a key link to both diseases, excessive vascular endothelial growth factor.

Another potential factor pushing up the price of Regenxbio stock is the possibility that it could be bought by a larger pharmaceutical company looking to diversify its portfolio in the burgeoning gene therapy space. Late last month, for example, Eli Lilly announced it had a nearly $1 billion deal in place to purchase Prevail Therapeutics, which, like Regenxbio, specializes in gene therapies.

3. Koppers Holdings is building a solid foundation

Shares in Koppers Holdings are down more than 20% over the past year, but they've climbed more than 36% over the past three months. The company produces treated wood products, wood treatment chemicals, and carbon compounds. Some of the company's products represent the backbone of the country's infrastructure, such as pressure-treated railroad ties and utility poles, pressure-treated wood for home repairs, and chemicals for the production of concrete, rubber, and plasticizers.

While business slowed during 2020 because of the pandemic, it did so only slightly. Management expects sales of $1.6 billion for 2020, compared to $1.65 billion in 2019, and earnings before interest, taxes, depreciation, and amortization (EBITDA) to be between $204 million and $210 million, compared to $201.1 million in 2019. 

In November, the company said it had sales of $121.7 million, a rise of 1.8% over the same month in 2019. Much of that was driven by the company's performance chemicals segment, which saw a 28.9% sales rise because of increased demand for residential treated lumber. That helped make up for lowered sales in the company's other segments of railroad products and services, and its carbon materials and chemicals segment.

There's a lot to like about Koppers Holdings. It has increased cash from operations the past three quarters, boosted EBITDA growth, and trimmed $125 million of debt in 2020. The stock seems relatively cheap with a price-to-earnings ratio (trailing 12 months) of 5.2, compared to the typical ratio of around 23 for a chemical company.

KOP EBITDA (TTM) Chart
Data source: YCharts.

Making the right choice for you

I like all three companies, though they don't have that much in common other than being small-cap stocks that are profitable and have potential.

I like Zynex Medical the most after its breakout year. It still has great fundamentals and its recent slide has made its price reasonable. Koppers Holdings has the slowest growth of the three, but is the best priced. Looking at its earnings and stable cash flows, it may be the best choice for risk-adverse investors.

Regenxbio is probably the riskiest of the three but its gene therapy solutions make it an attractive buyout candidate, and the stock could soar this year.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Koppers Holdings Inc. Stock Quote
Koppers Holdings Inc.
KOP
$30.69 (3.33%) $0.99
REGENXBIO Inc. Stock Quote
REGENXBIO Inc.
RGNX
$31.89 (5.25%) $1.59
Zynex, Inc. Stock Quote
Zynex, Inc.
ZYXI
$12.58 (-1.95%) $0.25

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

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