For nearly 17 months, investors have enjoyed what's arguably the greatest bounce-back rally from a bear-market bottom in history. As of this past weekend, the benchmark S&P 500 had doubled from its March 2020 coronavirus pandemic low. In other words, long-term investing wins again.
But just because the stock market is seemingly hitting one new high after another, it doesn't mean there's not value to be had. Since the month began, I've opened positions in or added to three small-cap growth stocks that I can all but assure you are well off Wall Street's radar.
Image source: Getty Images.
Jushi Holdings
The first stock I had been itching to add to my portfolio is U.S. marijuana stock Jushi Holdings (JUSHF +1.90%). The primary reason I hadn't added it sooner was The Motley Fool's transparent disclosure policy. To sum things up, I couldn't go long enough without praising Jushi in writing to actually buy it for my personal portfolio -- until earlier this month (Aug. 3), that is.
The important thing to understand about U.S. pot stocks is that they don't need federal legalization to excel. With 36 states legalizing marijuana in some capacity, cannabis stocks merely need the Department of Justice to maintain its hands-off policy, which looks to be the stance moving forward. According to New Frontier Data, the U.S. weed industry could be generating $41.5 billion in annual sales by 2025.
Compared to other multistate operators (MSOs), Jushi is a tiny tot. It only has 20 operational dispensaries, with plans to open another seven before year's end. What's far more intriguing about the company is how it's chosen to expand its reach. Jushi expects to generate 80% or more of its revenue this year from the trio of Pennsylvania, Illinois, and Virginia.
All three are limited-license states. Pennsylvania and Illinois limit how many retail licenses will be issued in total, and to a single company, whereas Virginia assigns licenses by jurisdiction. By targeting limited-license states, Jushi is ensuring that it won't be overrun by an MSO with deeper pockets.
Another selling point for Jushi, to me at least, was insiders aligning their interests with those of shareholders. Approximately $45 million of the first $250 million in capital raised by Jushi came from insiders and executives. Generally, good things happen when company executives have skin in the game.
With Jushi expected to turn the corner to recurring profitability in 2022, the company's insane growth rate also caught my attention. Although estimates vary -- as you'd expect from an industry with no true legal precedent -- Jushi could be pushing close to $1 billion in annual sales by 2024 or 2025. For context, the company brought in nearly $81 million in sales last year.
By all accounts, Jushi looks to be the biggest bargain in the cannabis space.
Image source: Getty Images.
EverQuote
The second small-cap growth stock I opened a new position in this month (on Aug. 12) is online insurance marketplace EverQuote (EVER +4.41%).
I know what you're probably thinking, and yes, insurance is a slow-growing, boring industry. What makes EverQuote such an alluring company is its focus on digital advertising. The U.S. insurance market will spend on the order of $154 billion via distribution and advertising in 2021, with this figure growing by about 4% annually through 2024. Of this $154 billion, $6.5 billion will be digital spending, which is estimated to grow by 16% annually through 2024. It's this digital ad-spending space that EverQuote calls home.
EverQuote's online insurance marketplace is designed to be a benefit to consumers and insurers. With 19 out of 20 major auto insurers onboard, consumers are able to quickly comparison shop policies and make an informed decision. Meanwhile, insurers are getting more bang for their advertising buck. Since the people obtaining quotes on EverQuote's platform are motivated/qualified shoppers, insurers are seeing a healthier return on their marketing capital. Approximately 1 in 5 consumers who obtain a quote purchase a policy.
The company is also expanding its reach to new verticals, including home, renters, commercial, health, and life insurance. These new verticals have been consistently growing revenue at a faster clip than auto policies, and they represent the perfect add-on opportunity for EverQuote's online marketplace platform.
Lastly, EverQuote's operating metrics have my full attention. The company's variable marketing margin has risen from 24.2% in 2015 to 31.3% in 2020, while sales have compounded by an annual average of 29% over the same time frame. With EverQuote, like Jushi, on the cusp of recurring profitability, the sky could be the limit.
Image source: Getty Images.
The Original Bark Company
The Original Bark Company (BARK +1.27%) is the third off-the-radar small-cap growth stock I bought in August (also on Aug. 3), albeit this buy merely added to my existing position.
As its name implies, Bark is a dog-centric products and services company. Although the pet industry isn't the fastest-growing, it's about as recession-resistant an industry as you'll ever come across. Data from the American Pet Products Association finds that it's been more than a quarter of a century since year-over-year spending on companion animals in the U.S. declined. An estimated $109.6 billion will be spent on our furry family members in 2021, with more than $44 billion expected to be spent on food and treats. Pardon the pun, but that's where Bark comes into play.
One of Bark's biggest advantages is that it's a subscription-focused company. Approximately 90% of the company's $117.6 million in second-quarter sales derived from online subscriptions, with the remainder coming from products placed in roughly 23,000 retail stores throughout the U.S. Focusing on subscriptions means less in the way of overhead costs and much more predictable cash flow.
Speaking of subscriptions, Bark has grown its number of active subscribers from 663,000 at the end of fiscal 2020 to about 1.8 million, as of the end of the second quarter of fiscal 2022. This rapid subscriber growth has the company on track to maintain a 20% to 30% annual growth rate through fiscal 2026, if not beyond.
Innovation is also key with Bark. In addition to its monthly BarkBox treat and toy deliveries, the company introduced two services last year that'll likely become key to its long-term success. Bark Home provides a variety of basic-need goods and accessories, such as dog beds, leashes, and collars. Meanwhile, Bark Eats works with owners to create a personalized dry food diet. The addition of these new services is sending add-on sales significantly higher, which should be good news for Bark's already impressive gross margin of around 60%.
Bark has quickly become one of my favorite stocks to buy, and I fully expect it to outperform the broader market over the next decade.
