Wall Street and investors have enjoyed a historic bounce-back rally since hitting the pandemic bottom 22 months ago. It took less than 17 months for the widely followed S&P 500 to double in value, with many well-known, time-tested companies leading the charge higher.
But while brand-name stocks have been the preferred path to riches of late, it's small-cap stocks (those with market caps ranging from $300 million to $2 billion) that typically offer the greatest reward potential. With the Federal Reserve looking to take its foot off the gas pedal in 2022, the following five small-cap stocks stand out as intriguing values that can make you a lot richer.
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PubMatic
One of the smartest small-cap stocks investors can add to their portfolios for 2022, and likely well beyond, is PubMatic (PUBM 3.02%).
PubMatic is a sell-side platform in the programmatic-ad space. In easier-to-understand terminology, this just means it assists publishers with selling their display space to advertisers. While publishers are able to provide certain inputs, such as setting the minimum price they'd be willing to accept to sell their display space, PubMatic's machine-learning algorithms handle the rest (i.e., the "programmatic" aspect).
The beauty of PubMatic's operating model is that ad dollars continue to shift to digital platforms, such as mobile, video, and connected TV. This is particularly true as cord-cutting ramps up and households choose other means to view their content. Whereas PubMatic is predicting that global digital ad spend will grow by 10% annually through 2025, its sales have consistently more than doubled this forecasted growth rate.
To build on this point, PubMatic has recorded four consecutive quarters with at least a 50% organic growth rate. This means existing publishers were spending at least 50% more on a year-over-year basis.
With PubMatic profitable on a recurring basis and valued at less than five times Wall Street's forecasted sales for 2022, it looks like a bargain.
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Bark
One of the best ways to get rich is to buy into unstoppable trends. A perfect example is small-cap stock Bark (BARK 1.82%), which provides dog-focused goods and services.
According to the American Pet Products Association (APPA), over 90 million homes own a pet, including 69 million with a dog. Last year, an estimated $110 billion was spent on companion animals, and it's been at least a quarter-century since year-over-year spending on our furry friends declined. In other words, people love their pets and aren't afraid to open their wallets to show it.
What makes Bark so special is that it's predominantly an online subscription-model business. Even though the company has its products in over 23,000 retail stores nationwide, nearly 90% of its revenue comes from its 2.1 million subscribing customers. The subscription model helps with customer retention and tends to provide predictable cash flow. Perhaps even more important, it's also responsible for reducing overhead costs and keeping the company's gross margin around 60%.
Bark's new product and service innovation is driving rapid growth and add-on sales, too. In 2020, the company introduced Bark Home and Bark Eats. The former allows dog owners to buy basic accessories, such as collars and beds, while the latter works with owners to develop personalized dry-food diets for their pooches.
Although Bark is spending aggressively on marketing, pet stocks have a solid history of outperformance for patient investors.
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Jushi Holdings
The U.S. cannabis industry is packed with high-growth, small-cap stocks that are now priced in value territory. At the top of the pack, I'd place U.S. multi-state operator (MSO) Jushi Holdings (JUSHF 4.53%).
To be clear, it would be good news if Congress passed cannabis reforms at the federal level. However, federal reforms aren't necessary for most MSOs to thrive. We've watched 36 states legalize cannabis in some capacity, which is providing more than enough opportunity for MSOs to benefit from organic growth and state-level legalizations.
Jushi has a two-pronged approach to growth. Most of the company's proverbial chips are bet on four limited-license markets: Pennsylvania, Illinois, Massachusetts, and Virginia. Limited-license markets either cap the number of dispensaries that can operate in a given state or assign licenses by jurisdiction (as in Virginia). The point is that smaller players like Jushi gain some level of competitive protection by choosing to operate in potential billion-dollar markets with limited-license issuance.
Second, Jushi hasn't been afraid to make acquisitions in high-dollar markets. As an example, it acquired two dispensaries in California a year ago. California is the largest weed market in the world, by annual sales.
Jushi is registering some of the fastest sales growth in the industry and is expected to turn the corner to recurring profitability in 2022. That makes it a no-brainer buy.
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Lovesac
Another small-cap stock that can make investors a lot richer in 2022 is furniture company Lovesac (LOVE 0.55%).
Typically, the furniture industry is a low-margin, boring operating model that's reliant on foot traffic to brick-and-mortar stores. Lovesac is completely disrupting this stodgy industry with its unique products and omnichannel presence.
Many moons ago, Lovesac was best-known for its beanbag-styled chairs known as "sacs." Nowadays, approximately 85% of its sales derive from selling modular couches known as "sactionals." Because sactionals can be rearranged dozens of ways, they're designed to fit most living spaces.
Sactionals also have around 200 different washable-cover choices, so any color scheme or theme can be matched within a home. Further, the yarn in these covers is made entirely from recycled plastic water bottles. To sum up, this is a functional and environmentally friendly product that gives buyers plenty of choice.
The interesting thing about Lovesac is how effective the company has been in shifting sales, when necessary. When brick-and-mortar furniture stores closed or dealt with a significant drawdown in foot traffic during the pandemic, Lovesac shifted almost half of its sales online. This helped to reduce overhead costs even more and pushed the company to recurring profits well ahead of Wall Street's forecast.
Investors should expect Lovesac to continue to crush Wall Street's profit projections in 2022.
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Ping Identity Holdings
A fifth and final small-cap stock that can make you richer in 2022 is cybersecurity company Ping Identity (PING).
Although there are faster-growing trends than cybersecurity, there's arguably not a more consistent double-digit growth opportunity this decade. No matter how well or poorly the U.S. economy and stock market are performing, hackers and robots don't take time off. This means protecting enterprise and consumer data has become necessary for businesses of all sizes. That's where Ping comes into play.
As its name suggests, Ping specializes in identity-verification solutions. The company's cloud-based and artificial intelligence-driven platform works especially well when layered with on-premises security solutions. Ping helps to fill in the gaps and cover what on-premises solutions might struggle with, such as continuous monitoring and authorization.
What makes Ping such a great buy is that it's still inexpensive following its temporary struggles during the pandemic. Even though some of its clients chose shorter term-based licenses during the initial stages of the pandemic, Ping's annual recurring revenue (ARR) has steadily grown by double digits. Since well over 90% of Ping's revenue comes from subscriptions, ARR is a better measure of the company's health than overall sales growth.
Considering that Ping Identity is profitable and valued at less than six times its ARR, as of Sept. 30, it has the look of a solid buy.
