The first two months of 2022 haven't gone as planned for Wall Street or the investing community. Historically high U.S. inflation and rising geopolitical tensions have sent the broad-based S&P 500 and tech-driven Nasdaq Composite into correction territory (down at least 10% from their highs).
Although moves lower in the stock market are unavoidable and at times worrisome, they're also an undeniable opportunity to buy into game-changing businesses at a discount. Eventually, every crash or correction throughout history has been put into the rearview mirror by a bull market rally.
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Arguably the best deals to be had right now can be find in the small-cap arena. Small-cap stocks (those with market caps ranging between $300 million and $2 billion) usually offer above-average growth prospects, relative to brand-name companies, but may also lack the time-tested qualities investors find with mature businesses. In other words, higher risk but bigger reward potential.
Right now, there are three supercharged small-cap stocks investors can buy that offer what I believe to be up to 300% upside by 2025.
PubMatic
The first small-cap with the ability to quadruple in value by mid-decade is cloud-based programmatic ad technology company PubMatic (PUBM +5.08%). A 300% gain would take the company's valuation to $6 billion from the $1.5 billion it closed at this past week.
NASDAQ: PUBM
Key Data Points
PubMatic is what's known as a sell-side platform in the programmatic ad space. What this means it is helps publishers sell their display space to advertisers, with machine-learning software handling the buying, selling, and optimization of ads. Although publishers are able to provide certain inputs, such as the minimum price they'd accept for selling display space, the process of buying, selling, and optimizing ads is done without human interaction.
What's noteworthy about PubMatic's customizable platform is that the highest-priced ad isn't always going to be placed. Rather, the most relevant content is tailored to users. This ensures advertisers get the best bang for their buck, which should improve the ad pricing power of publishers over time.
PubMatic superior growth is also a reflection of its central role in digital programmatic ads. It's no secret that advertisers are shifting their spending away from print and toward channels like video, connected TV, and over-the-top content. While the expectation is for global digital ad spend to grow by 10% annually through mid-decade, PubMatic's organic sales growth has hit at least the 50% mark in four consecutive quarters (through September 2021).
Based on its growth trajectory, PubMatic looks to be on track to more than double its sales and per-share profit by mid-decade. In short, it's an absolute steal in the ad-tech space.
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Planet 13 Holdings
Another small-cap stock with all the tools necessary to deliver 300% returns to its shareholders by 2025 is cannabis multi-state operator (MSO) Planet 13 Holdings (PLNH.F 1.68%). A quadrupling in value would take its market cap to more than $2.1 billion.
For lack of a better pun, marijuana stocks have been buzzkills over the trailing year. It was anticipated that a Democrat-led Congress would lead to federal cannabis reforms, which haven't materialized, as of yet. However, federal legalization isn't necessary for most MSOs, especially when 37 states have legalized pot in some capacity. Planet 13 is one such MSO that can succeed with or without federal reforms.
OTC: PLNH.F
Key Data Points
What really separates Planet 13 from other dispensary operators is the importance it places on the experience of its customers. You see, Planet 13 only has two operating dispensaries at the moment -- but they're huge. The Las Vegas SuperStore is larger than the average Walmart and features a café, events center, and consumer-facing processor center. Meanwhile, the Orange County, Calif., SuperStore spans 55,000 square feet, with 30% of this square footage devoted to selling space.
The company's stores are designed to attract tourists in heavily traveled locations, as well as build up local clientele in its core markets. For example, the Las Vegas SuperStore utilizes self-pay kiosks for consumers who know what they want, while also offering individual budtenders to customers to help guide them through the store's vast selection of products.
Management somewhat recently announced that the company's next dispensaries will be located in Chicago, Ill., Miami, Fl., and Orlando, Fl. Illinois topped $1 billion in weed sales following its first year of recreational pot sales, while Florida is on pace to be the No. 3 state for cannabis sales by 2024.
With the company also selling higher-margin, proprietary cannabis brands at its dispensaries, it shouldn't have any trouble pushing to recurring profitability and significantly growing its top-line through 2025.
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Root
The third and final small-cap company with up to 300% upside by 2025 is technology-driven auto insurance company Root (ROOT 0.84%). A quadrupling in Root's valuation would push its market cap to nearly $1.9 billion by mid-decade.
Although many auto insurers are profitable, the metrics they've used to price their policies for decades all share one thing in common: they have almost nothing to do with actual driving habits. Root wants to change this.
NASDAQ: ROOT
Key Data Points
Traditional insurance providers lean on factors like a person's credit score or their marital status to determine how risky they are behind the wheel. Root, on the other hand, relies on telematics. By utilizing sensitive data-culling instruments in a person's smartphone, such as the gyroscope and accelerometer, Root can determine how safe a driver is based on the G-forces associated with their braking, accelerating, and turning. The idea is that understanding a driver's actual driving habits should allow Root to more accurately price insurance policies up front for potential customers.
This telematics-based approach has significant upside, but it also comes with a drawback. Since no major insurer has attempted to price auto policies this way before, Root has had to spend aggressively to build up its brand and awareness of its products. Not surprisingly, Root has been losing a lot of money. Moving forward, the company will be reducing its marketing budget to lessen its cash burn in an effort to push toward positive operating cash flow.
However, Root has previously generated a small nominal quarterly gross profit from its auto insurance operations. This suggests its telematics-based approach can help reduce losses associated with bad drivers.
Furthermore, Root has introduced renters insurance as another way to boost brand awareness and create add-on opportunities. Though it represents a very small percentage of premiums in force, renters insurance has the potential to become a solid long-term contributor.
Root is the biggest question mark of this small-cap trio, but it offers the most upside if telematics-based auto insurance is a success.
