Without question, the Nasdaq exchange has been on fire since it bottomed out during the 2008-2009 financial crisis. An investor could hardly have done any better than to bet on the technology sector during that time.
In November, though, tech stocks started losing their luster. Concerns about rising inflation -- and about the interest rate hikes that the Federal Reserve will use to combat it -- among other issues, led traders to cycle out of speculative growth companies and into more consumer defensive stocks. As a result, the tech-heavy Nasdaq is down by more than 10%. That's firmly into correction territory. The index even sank briefly to a level more than 20% below its peak, putting it into bear market territory.
Investors, though, might want to consider searching among small-cap stocks for their next investments. Small caps provide investors with some of the best opportunities for market-beating returns, in part because large institutions tend to ignore them and analysts usually don't cover them. By the time the pundits realize they're there, they've already grown and appreciated in price.
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The S&P SmallCap 600 index performed admirably during the raging bull market, returning 636% compared to the tech-laden Nasdaq's 807% gain, but hasn't fallen nearly as far as the exchange during the sell-off. While the Nasdaq is down by 14.6%, the S&P SmallCap 600 is off by 5.1%.
Investors should look to the components of S&P SmallCap 600 for small-cap picks rather than the Russell 2000, because the S&P index has an additional qualitative requirement -- profitability -- that has allowed it to handily outperform its rival over various time periods.
Below are two small-cap stocks primed for growth that you won't want to miss out on.
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Monarch Casino & Resort
Like many businesses, Monarch Casino & Resort (MCRI -0.70%) was hard-hit during the earlier stages of the pandemic, when its casinos were temporarily closed. But it has been bouncing back strongly since then. Revenue nearly doubled in the latest quarter while adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) almost tripled.
Monarch operates just two casinos, the Atlantis in Reno, Nevada, and the Monarch in Black Hawk, Colorado, 40 miles west of Denver. It was recently honored with a 39th place showing on Forbes' list of America's Best Small Companies.
Monarch last year finished converting its Black Hawk location to a full-service casino resort and spa; betting limits were recently eliminated in Colorado, which helped the resort operator turn in record quarterly and full-year results.
There are 21 casinos in the Black Hawk market, and Monarch has a commanding 23.1% share -- a slice that has been growing since it opened its hotel in late 2020. Its Reno resort has a better than 15% share despite the intensely competitive market and the presence of much larger, better-known, and better-financed casinos. Monarch also operates its own sportsbook to capitalize on the growth of sports betting.
Now that it has completed its Black Hawk development, it plans to use its strong free cash flow to pay down debt, pursue acquisitions, and return money to shareholders.
At $1.6 billion in value, look for this small-cap casino operator to make a bigger splash on the market.
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Innovative Industrial Properties
Marijuana-focused real estate investment trust (REIT) Innovative Industrial Properties (IIPR -0.17%) has gotten off to a bumpy start in 2022, but over the past five-year, three-year, and one-year periods, it has either kept pace with the major indexes or far outpaced them.
Investor enthusiasm for the cannabis sector comes and goes, and though it's in a lull at the moment, the industry has a massive potential runway for growth, and Innovative Industrial Properties will be capitalizing on it.
The REIT isn't a typical pot stock. It buys the properties of marijuana growers and retailers, then leases them back to the sellers under long-term triple net leases where the tenants are responsible for the sites' taxes, maintenance, and insurance.
The real estate market can be tricky, but Innovative Industrial Properties' average lease term is 16.6 years, which means that even if federal legalization of marijuana gives cannabis growers better access to traditional financial services and reduces their need to use such lease deals to raise money (something I discount as a significant threat), this REIT's bottom line will be protected well into the next decade.
Down by 22% year to date and off by nearly 30% from its high, Innovative Industrial Properties looks ripe for a rebound.
