If you're like most investors, the bulk of your growth stocks come from the large-cap realm. We tend to gravitate toward such names because these companies are seemingly everywhere, as is information about their stocks.
Veteran investors know, however, smart diversification isn't just a matter of spreading your holdings out across several sectors. Your portfolio should also represent a mix of various-size companies, since these differences can allow different sorts of results in different economic environments. Generally speaking, small caps tend to be nimbler and better focused on doing one thing very, very well.
With that as the backdrop, here's a look at three great small-cap stocks that might not have sidestepped marketwide weakness, but should be able to lead any marketwide recovery. In fact, they might not even need the broad market's help to start dishing out gains again.
1. Celsius Holdings
It's not a household name. But there's a decent chance you know someone who regularly uses a Celsius Holdings (CELH -1.41%) product.
The company is often classified as an energy drinks outfit. But it says its beverages support muscle recovery, burn fat, and increase your metabolism. All of its products are sold under the Celsius label.
It's a competitive business, including better-known energy drink makers like Monster Beverage and Red Bull. Whatever Celsius Holdings is doing, however, is working. This fiscal year's top line is on pace to more than double, and next year's sales should be up 50% from this year's likely levels. More than that, despite its relatively small size and young age, the company is now usually profitable. Analysts are projecting per-share earnings of $1.04 for 2023.
Look for more of this same sort of progress, too. CEO John Fieldly knows how to connect with consumers in places where they're more likely to make a purchase. Increasingly, that's in a shopping-club warehouse like Costco, or online via a site like Amazon. Beverage giant PepsiCo recently made a major equity investment in the company as well, establishing a partnership that promises to put Celsius products into the thick of PepsiCo's supply chain.
Celsius shares are still volatile. A big part of the sell-off since August is still there, leaving lots of room for near-term and long-term upside for this up-and-comer.
2. Dutch Bros
Like Celsius, Dutch Bros (BROS -1.41%) isn't a nationally recognized name. And like Celsius, its brand recognition is growing fast. Its top line is expected to expand by nearly 47% this year, and grow another 33% next year.
It's also profitable, projected to earn $0.35 per share next year. That translates into a fairly rich forward-looking price-to-earnings (P/E) ratio of just over 100. But given its sales growth and likely greater earnings growth beyond next year, the premium could well be worth paying.
Dutch Bros is a chain of 641 drive-thru coffee stands in 14 states, most of which are found up and down the West Coast. For perspective, rival Starbucks has 35,711 stores worldwide, with 15,878 in the United States.
What Dutch Bros lacks in size, however, it more than makes up for in schtick. The company is focused on fun, its employees, the communities it serves, and great coffee at an affordable price. Consumers that patronize both coffee chains will see a dramatic difference, with Dutch Bros clearly being the more casual, less stuffy of the two.
Increasingly, that's what consumers say they want. It would also be naive to ignore that Starbucks suffered a few high-profile gaffes of late, while there are efforts at several of its stores to form unions. This dynamic creates something of a marketing edge for Dutch Bros coffee.
The company estimates it will open at least 130 new locations this year, and its growth should accelerate to at least 150 new locations next year.
3. Revolve Group
Add Revolve Group (RVLV 0.32%) to your list of small-cap stocks to consider buying. Shares of this online fashion retailer are more than primed to bounce back from a steep sell-off since last November.
It's a crowded sector. Besides mainstream brick-and-mortar department stores like Macy's and Nordstrom, there are direct-to-consumer native brands such as Stitch Fix and secondhand-apparel retailer ThredUp.
There is one difference between Revolve and competitors like ThredUp, Stitch Fix, and the online operations of several well-established brick-and-mortar retailers. Revolve is reliably profitable, even if those profits are somewhat inconsistent from one year to the next. Longer term, the bottom line is growing, as is the top line.
If you're trying to figure out what Revolve Group is doing that other online fashion retailers aren't, it's not readily apparent. But its feel, product curation, and pricing just click with the right consumers in the right way. That likely has much to do with its focus on its target market: millennials and Gen Z, who are more apt to shop online than their older counterparts.
It also has a sustainable and socially inclusive operation, and is clever when it comes to marketing. For instance, just last week, the company launched a brand ambassador program for its FRWD label. It offers commissions on sales prompted by influencers and regular customers and follows last year's introduction of a similar program for its flagship Revolve brand.
The stock price is down 70% for the past year. But that translates into trailing and forward-looking P/E ratios of 22.9 and 32.6, respectively. That's about as cheap a growth stock as you'll find successfully doing what most other apparel retailers are struggling to do in the current environment.
