Small-cap stocks occasionally get a bad rap from Wall Street and investors. Small-caps, often defined as companies valued at less than $2 billion, are usually thought of as risky and volatile investments. Yet if we look back at 2016, small-cap stocks absolutely mopped the floor at the S&P 500. The Vanguard Small-Cap ETF wound up gaining 16.6% for the year, compared to just a 9.5% gain for the broad-based S&P 500. Investors who take the time to analyze small-cap stocks can occasionally walk away with absolute gems.
The good news for you is there are always small-cap stocks being overlooked by Wall Street. If you're looking for the next diamond in the rough, consider these four top small-cap stocks this winter.
ANI Pharmaceuticals Inc.
While I'm not entirely sure how specialty pharmaceutical manufacturer ANI Pharmaceuticals (NASDAQ:ANIP) has remained off Wall Street's radar for so long, the company's 59% average annual revenue growth over the past five years should put it firmly on yours.
ANI Pharmaceuticals primarily sells generic drugs, with generics comprising $65.9 million of the $90.4 million in revenue through the first nine months of fiscal 2016. The beauty of generic drugs is that they're being promoted aggressively by insurers and pharmacy-benefit managers for their substantially lower costs than branded medicines. A report from QuintilesIMS Institute for Healthcare Informatics estimated that by 2020 some 91% to 92% of all prescriptions written would be for generic drugs, up from 88% in 2015. This would imply ANI has volume strongly in its corner, and perhaps even stronger pricing power than investors realize.
ANI Pharmaceuticals also has a sizable pipeline, complete with 78 products in development. Those 78 products cover an expected market worth $3.7 billion. What's more, ANI wound up acquiring 53 of its 78 products, 46 of which it believes could be brought to market with ease. This should allow for steady revenue and profit growth in the years to come.
Between 2015 and 2019, ANI's full-year EPS is expected to nearly triple to $7.61, while its revenue will nearly quadruple from $76 million to an estimated $287 million. ANI Pharmaceuticals is a highly underrated top small-cap in the healthcare arena you should know.
Coeur Mining Inc.
Just sneaking in under the $2 billion market cap requirement is silver-mining company Coeur Mining (NYSE:CDE). Coeur Mining was the top-performing silver stock in 2016, yet interestingly enough it also had the highest all-in sustaining costs (AISC) of any silver-mining company. Normally, high costs would be a red flag for precious-metal investors, but not in this instance.
Coeur Mining is in the process of making a big transition. It's moving from a combination of open-pit mining and underground mining to an entirely underground operation. Winding down its open-pit mining operations and expanding its underground mines isn't cheap, which is why the midpoint of its fiscal 2016 AISC is $14.50 per silver ounce, the highest in the silver industry. However, underground mining comes with key advantages: it requires less capital spending, and ore grades tend to be higher. In other words, Coeur Mining's production should actually increase, all while its AISC declines.
Coeur Mining has also done an admirable job of reducing its costs internally while undergoing this transformation. It slashed its costs by 29% between 2013 and 2015, and in its most recently reported quarter it wound up cutting its debt by 21%, or $109.3 million. Less debt means more financial flexibility and lower annual interest expenses.
The real icing on the cake here is the cash flow per share growth. After generating $0.88 in cash flow per share in 2015, Wall Street is expecting $1.85 in cash flow per share by 2019. Cash flow per share growth in the double-digits is a real possibility through the end of the decade, making Coeur an attractive small-cap stock to consider buying.
Another top small-cap stock that could be worth stashing away over the long run is Aircastle (NYSE:AYR), a leasing company with nearly 200 commercial aircraft in its portfolio. Leasing commercial airplanes may not sound terribly exciting, but sometimes the most boring businesses are the steadiest and most profitable.
Working in Aircastle's favor is the expectation that jet fuel costs are going to rise over time. Higher fuel costs (fuel costs are usually an airline's highest line-item expense) usually coerce airlines to consider making their fleets more fuel-efficient. One way to do that is to buy newer, more fuel-efficient planes. But new planes are incredibly costly, and it can take years to fulfill an order. Instead, companies like Aircastle provide leased alternatives which can improve fuel efficiency for a fraction of the cost of buying a new plane.
On the flipside, Aircastle walks away with a weighted average lease term of 5.3 years, meaning its revenue and cash flow are quite predictable. More so, Aircastle has spent more than $2 billion in recent years upgrading its fleet to encourage airlines to lease. Between the third quarter of 2011 and the third quarter of 2016, the weighted average age of its fleet has fallen from 10.8 years to 7.6 years.
And if you're worried about Aircastle's debt and liquidity, don't be. The company has prudently deployed capital in recent years, and it has the luxury of selling older planes for a profit, giving it the ability to use that income to acquire newer aircraft. With double-digit EPS accretion a strong possibility in fiscal 2017, and a 4.7% dividend yield to boot, Aircastle should be on your radar.
Web.com Group Inc.
Finally, value-added internet services provider and domain hosting company Web.com (NASDAQ:WEB) is a top small-cap stock worth a closer look.
Most domain hosting companies get lumped into one group by Wall Street and are, presumably, slow-growers that can only cut costs to boost margins and profits. Web.com doesn't belong to that crowd. Compared to its peers, Web.com has the highest percentage of its business dependent on value-added internet solutions (i.e., search engine optimization and website design) to small businesses. In fact, more than half of its annual revenue is derived from its subscription value-added services (VAS). As you might imagine, VAS has a much higher growth rate and margin than simple domain hosting, which is why Web.com is promoting it so much. With nearly 50% of websites not yet optimized for mobile, and three-quarters of websites having no tools to measure advertising effectiveness, Web.com has a large potential pool of future customers out there.
That brings us to the next point: Yodle. In February 2016, Web.com acquired Yodle for $300 million, with the acquisition expected to add more than $200 million in revenue annually, and boost EPS immediately. What's more important is that Yodle is expected to lower Web.com's costs and improve customer retention by really hitting home with local markets. If Web.com can continue to reduce customer churn, it could become a force to be reckoned with.
Slated to generate $3.40 in EPS by 2019, but currently trading at less than $20 per share, Web.com could offer serious value for patient investors.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong. The Motley Fool recommends Quintiles IMS Holdings. The Motley Fool has a disclosure policy.