When the market crashes, as it has recently because of fears of the coronavirus, it frequently takes smaller companies along for the ride. That's in part because smaller companies are viewed as having fewer resources than their larger brethren for navigating through prolonged challenges, making them seem riskier.
While that may be true, the flip side is that smaller companies also tend to be more flexible and nimble than their larger counterparts. That makes them more likely able to adapt quickly to changing circumstances, giving the strongest among them the chance to bounce back quickly after the market's panic subsides.
With that in mind, here are three top small cap stocks that look strong enough despite the market's recent concerns to be potentially worth buying in March.
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A company that should shine if times get tough
Rent-A-Center (RCII -1.23%) is a rent-to-own business. It leases things like furniture and appliances to customers, who, if they successfully pay their bills over time, get to keep their products at the end of the payment period. If they don't pay their bills in full, Rent-A-Center repossesses the item and then can rent it back out to someone else, keeping all the payments it collected in the interim.
The company's pricing model is such that if the customer does pay the item in full, that customer is paying far more than it would have cost to buy it directly or even with a typical traditional loan. That means that customers who can get a better deal are probably going elsewhere. And that implies that Rent-A-Center's business may hold up fairly well when times are tough, as more people will find themselves with few other options.
Despite that structural reality, Rent-A-Center's shares are down sharply since mid-February. At a recent price of $20.91 per share, it's trading at less than seven times analysts' estimates for 2021 earnings. That makes it a decent bargain, unless things get so rough that even its very high pricing can't cover the cost of all the repossession work it has to do to reclaim unpaid goods.
A business facing near-term challenges from coronavirus fears
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Like many companies involved in the travel industry, Spirit Airlines (SAVE) has seen its shares plummet in recent weeks on fears that the coronavirus would curtail travel. While it's highly likely that travel will be down in the near term, real value from investing is created over the long term, through sustained successful operations. Investors who can see past the short-term pain that grips Wall Street during a panic can often profit handsomely as a company gets over those near-term hurdles.
At a recent price of $25.23, Spirit Airlines recently traded hands at a minuscule four times its anticipated 2021 earnings. That means that as a long as the company survives the near-term coronavirus panic and is able to return to some semblance of normality in the not-too-distant future, today's price could be a bargain. With a bit over $1 billion in cash on its balance sheet and a current ratio around 1.25, Spirit looks to have the financial flexibility to make it through a short-term panic.
Investors will need patience, however, as companies and vacationers are curtailing travel plans, which means near-term earnings will be negatively affected. The big unknown is how long it will take before an effective treatment or vaccine becomes available. When it does -- or if the outbreak runs its course with less mayhem than is currently priced into the market -- companies that were strong enough to survive will probably see their shares snap back.
A fairly large business hiding in a remarkably small-market-cap stock
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World Fuel Services (INT -0.73%) sports a market capitalization of around $1.9 billion, but it generated nearly $37 billion in revenue in 2019. Despite that huge revenue generation ability, the company earned just under $180 million for the year, delivering a net margin below half a percent.
The key reason for that tight margin is that it's in the fuel services business, with a focus on getting fuel to aviation, marine, and land transportation companies. Much of what it does involves managing the supply chain and commodity pricing complexity for fuel-intensive businesses. While it's important work, it's also work that its customers could potentially insource for themselves if World Fuel Services charged too large a premium, keeping its margins low.
Because the company is so tethered to logistics, fears of a global economic slowdown from the coronavirus sent its shares tumbling. Yet because so many of its own costs are tethered to its customers' fuel usage, its potential profitability is better protected from a slowdown in demand than you might expect from a company with such tight net margins. That helps give it flexibility to navigate a hiccup in the economy.
Analysts are expecting World Fuel Services to earn around $3.12 per share in 2021. At a recent market price of $27.81, it's trading at around nine times those anticipated earnings. That gives good reason to believe its shares could rebound as conditions normalize.
Small-cap stocks with sufficient flexibility can provide big opportunities
When the market corrects sharply, it has a tendency to take down most companies at the same time, whether they deserve it or not. It's during those market swoons that investors can often find the best opportunities among small-cap companies.
If you can find a small stock whose underlying business looks well positioned to thrive despite the pressure the market is putting on its shares, you may very well put yourself in a position to profit. Just make sure the company has the flexibility to withstand the short-term pain to maximize your chances of receiving that longer-term potential gain.
