Small-cap stocks are suddenly soaring.
The Russell 2000 small-cap index has jumped nearly 50% since the beginning of last November, benefiting from investor enthusiasm in response to the election and successful coronavirus vaccine trials. That performance is well ahead of the 20% gain for the S&P 500. Small-cap stocks tend to be more volatile than their large-cap counterparts and are more sensitive to macroeconomic news, which helps explain the strong recovery.
With investors still looking forward to the economic reopening later this year, the environment is favorable for small-caps. Keep reading to see three such stocks that all look ready to surge.
Image source: Getty Image.
1. CarParts.com
The coronavirus pandemic has been kind to e-commerce stocks like CarParts.com (PRTS). Shares of the online auto parts seller have skyrocketed, up 700% over the last year as the stock was essentially off of Wall Street's radar previously.
There's a good reason for that performance. Revenue jumped 69% in the most recent quarter and e-commerce sales were up 105% as the company has seen a strong tailwind during the crisis. Data from SimilarWeb shows CarParts.com had the fastest-growing auto parts website last year with site visits nearly tripling, while the No. 2 gainer saw just a 39% increase.
However, there's more to the CarParts.com story than just the pandemic. The company is in the midst of a turnaround that begin in early 2019 when CEO Lev Peker took over the company. Under his leadership, the company has changed its name from U.S. Auto Parts and streamlined its operations under one brand, CarParts.com. It's also opened three new distribution centers, improved its tech infrastructure, added hundreds of employees, and jettisoned underperforming business lines. As a result, gross margin has increased for six quarters in a row, showing the company becoming more efficient and profitable.
Those improvements should continue as CarParts.com speeds up delivery and adds new private-label product lines. Wall Street expects its growth to hit the brakes this year, calling for just 12% revenue growth. That seems like a lowball estimate, given the company's momentum, and the macroeconomic factors favoring auto parts sales in a recession. If CarParts.com can deliver another year of solid growth, the stock should continue to gain.
2. Perion Network
Like e-commerce, ad technology is another industry that's seen breakout growth. While much of the attention in the sector has been focused on larger companies like The Trade Desk, Roku, and Magnite, Perion Network (PERI 4.41%) has also emerged as a winner. Shares of the Israel-based small-cap stock have nearly tripled over the last year as ad-tech adoption has accelerated during the crisis, especially in areas like connected TV, or ad-based video streaming, which is one of the biggest opportunities in front of companies like Perion. The stock surged through February as news of Magnite's acquisition of SpotX seemed to spark rumors that Perion could be a target, and as Perion delivered a strong fourth-quarter earnings report.
Perion blew away expectations in that quarter, posting 51% revenue growth to $118.3 million. Unlike many small-caps, Perion is also solidly profitable with adjusted EBITDA margins of 10%, and adjusted earnings per share that jumped 41% in the fourth quarter to $0.45. The company saw tremendous growth in display and social advertising where revenue jumped 159% to $68.4 million, making up more than half of total revenue. Management credited its "rapidly growing content monetization engine" as well as two acquisitions in 2020 for the strong growth in that category.
Looking ahead to 2021, the company's guidance was conservative, calling for just 10% top-line growth, but it seems likely to surpass that given the momentum from the fourth quarter and that the broader industry is growing at around 30% a year. Perion also looks dirt cheap for its growth prospects, trading at a price-to-earnings ratio of just 25. With the momentum in display and social and the expected rebound in travel advertising, one of the company's key customer bases, it shouldn't have a problem beating that guidance.
3. DermTech
Genomics companies are attracting a lot of attention these days, and DermTech (DMTK -0.33%) is one that shouldn't be ignored. The stock has skyrocketed so far this year, more than doubling on the strength of its pigmented legion assay (PLA).
This technology, a patch that can detect melanoma before conventional biopsies do, is disrupting the skin cancer detection category, a market that is worth at least $8.1 billion in annual revenue according to the company, and that's just in the U.S. The product also has a 99% negative predictive value, meaning there's less than a 1% chance of its missing a melanoma.
DermTech's PLA has picked up a lot of momentum in recent months, helping to convince investors that the technology will go mainstream. Last week, the stock surged after the company announced an agreement with Blue Cross Blue Shield of Texas to make the PLA available to the insurer's 6 million members.
Investors also responded warmly to the company's stock sale last month, which will help fund the commercialization of the PLA as well as accelerate its new product pipeline. While the PLA looks promising in and of itself, the company's future products could also tap into large markets related to aging as the company is also focused on inflammatory and aging-related skin conditions.
For now, attention is squarely on the PLA. Expect the stock to react favorably as the technology makes progress toward reaching the market.
