Last year will likely go down as one of the craziest you'll ever experience as an investor. The broad-based S&P 500 plunged into bear market territory faster than ever before, and regained all of its losses in record time. All the while, tech stocks soared.
The new year promises to be less volatile (we hope), with the coronavirus vaccine rollout under way and new leadership in the United States. Given that the young bull market is just stretching its legs, it could be time for one of the most forgotten groups of stocks to shine: Small caps.
Small-cap stocks -- those with market caps between $300 million and $2 billion -- usually have more built-in risk than mid-cap and large-cap stocks, but offer exceptional upside potential if you hit on a game changer. As we move into 2021, the following three small-cap stocks all have the tools and intangibles to make you richer.
Marijuana stocks may well be one of the brightest industries in 2021 and throughout the decade. One small-cap pot stock that appears to have a fantastic formula for success is Florida-based Jushi Holdings (JUSHF 3.74%).
I know what you might be thinking, but no, this selection has absolutely nothing to do with Democrats winning narrow control of both houses of Congress and the White House. Although there's an increased likelihood of cannabis legalization and cannabis banking reform with Democrats in charge, it's not guaranteed. My belief is that Jushi only needs state-level legalizations, organic growth opportunities, and a hands-off approach from the federal government to shine.
Jushi stands out among a growing field of U.S. multistate operators for its core focus on limited license states -- i.e., states that issue a fixed number of licenses, or issue licenses based on county or jurisdiction. More than three-fourths of Jushi's projected 2021 sales will come from the limited license states of Pennsylvania, Virginia, and Illinois. Illinois, which opened its doors to recreational pot on Jan. 1, 2020, should become a billion-dollar annual sales market by 2024. Focusing on limiting license states minimizes competition just when the young Jushi is attempting to build up its brand.
This company is also unique for its funding participation from insiders and executives. Prior to the company offering 6.21 million shares for sale this past week, it had raised about $250 million since its inception. About $45 million of this capital had come from insiders and executives. Good things happen more often than not when insiders and execs have skin in the game just like their shareholders.
Look for Jushi to potentially triple its year-over-year sales in 2021.
Another small-cap stock that has the potential to make investors a whole lot richer in 2021 is modular furniture designer and retailer Lovesac (LOVE -1.29%).
Like most retail stocks, Lovesac was beaten to a pulp during the first-quarter coronavirus meltdown that hit equities in 2020. However, it finished the year having bounced nearly tenfold off of its lows thanks to its clear-cut competitive advantages in an otherwise stodgy furniture industry.
It begins with Lovesac's designs and craftsmanship. Though Lovesac's furniture is costlier than some of its peers, it can be rearranged to fit consumers' living spaces, and comes with more than 250 fabric choices. The yarn used to make the company's sactionals (its best-selling product) is made from 100% recycled plastic bottles. That means Lovesac is an ESG investors' dream stock.
What I find most impressive about Lovesac is how the company pivoted away from its physical showrooms to a predominantly online sales model during the pandemic. Lovesac's overhead costs were already lower than most furniture retailers and designers prior to the coronavirus. Now, with close to two-thirds of all sales generated online, the margin improvement is night-and-day. In fact, this shift to online retail helped Lovesac turn the corner to recurring profitability two years ahead of Wall Street's forecast.
Lovesac is seeing plenty of repeat business from its target customer (millennials), which bodes well for the company this year (and beyond).
Finally, 2021 could be the year that sees private health insurance exchange eHealth (EHTH 5.34%) thrive.
About four years ago, following President Trump's election and both houses of Congress going to Republicans, eHealth shifted its business focus to helping Medicare beneficiaries navigate their many choices in picking out a health insurance plan. Over the past four years, revenue derived from its Medicare segment has grown considerably. This is a trend that shouldn't have any issue persisting as more and more baby boomers reach the age of eligibility to enroll in Medicare.
The company's revenue from individual, family, and small business health plans really tapered off in recent years. This revenue decline wasn't unexpected considering President Trump's attempted dismantling of the Affordable Care Act (ACA). But with President-elect Joe Biden set to take office and build back the ACA, we may well see renewed importance placed on private exchange health insurance shopping.
Back in April 2019, the Congressional Budget Office released data showing that the number of uninsured Americans rose by 1.4 million between the end of 2016 and the end of 2018. Reigniting the foundation of the ACA could bring millions of new customers back into the fold, creating plenty of servicing and advertising opportunities for eHealth in its individual and small business segment.
Look for eHealth to be a surprising winner this year.