10 Small-Cap Stocks That Could Take Off in 2020

Small-cap stocks have the opportunity to become large-cap ones as their businesses grow over time. In addition, since they usually have fewer people following them than their larger brethren, the shares of smaller companies are more likely to be mispriced by the market. That gives investors in small-cap companies the chance to see outsized returns if they’re invested in companies with either room to grow or room to see their shares bounce to full value.

Of course, finding the successful ones is much easier said than done, and as with any investing, there are no guarantees. That argues for small-cap investors to take a portfolio approach, spreading their risk across multiple such companies in the hope that enough succeed to make up for the losses in the ones that don’t. With that in mind, here are 10 small-cap stocks that could take off in 2020.

Aimmune Therapeutics (NASDAQ: AIMT) is a research-oriented biotechnology company focused on treatments for food allergies like peanuts, eggs, and tree nuts. Its lead candidate, AR101, is sitting before the FDA, and if approved, could provide a huge relief for those suffering from peanut allergies. While the product hasn’t yet been approved by the full FDA, its advisory committee supported its use. That gives a decent reason to believe that it could actually be approved for commercial use.

Moving from a purely research-based business to a commercial one that generates revenue would be a huge step in Aimmune Therapeutics’ lifecycle. In addition to the direct benefits from that revenue, it would better allow the company to self-fund its future research and development. That future research is the key to the potential long-term health of the company, which is what would really allow it to take off.

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iRobot (NASDAQ: IRBT) is already well known for its Roomba robotic vacuums and Braava robotic mops, but it is expanding the reach of its robotic business. It is in the process of launching its Terra robotic lawn mowing system, which will enable people to keep their lawns manicured with far less ongoing effort. It also recently launched an education-oriented robot known as Root, which helps teach kids to code.

The introduction of new product categories bodes well for the potential long-term health of iRobot, but any sort of resolution to the trade war may provide a nearer-term boost to its shares. The company warned last month that impacts from the trade war were forcing it to reduce its guidance, which implies that if that trade war gets resolved, its business could pick back up.

Ferro (NYSE: FOE) makes coatings and colors that go into many of the products people use every day. The company has been around since 1919, which means it has seen and survived economic crises such as the Great Depression and the more recent financial meltdown. Still, fears of a global economic slowdown have knocked its shares down over the past year, to the point where they recently traded hands at around eight times the company's anticipated 2020 earnings.

That's a sign that the market fears that those earnings may not really come to fruition -- which is possible if the globe does slip into a recession. After all, since Ferro's business is based on other businesses' successes, it will unlikely be able to escape a slowdown that knocks its customers down. Still, if that much-feared slowdown doesn't occur, or if it turns out to be faster and shallower than the market fears, Ferro's shares could see a decent recovery as a better-than-feared future unfolds.

At home or at work more of your life is rooted online. As online identity theft becomes more common, it gets tougher to trust that you’re really dealing with who you think you’re dealing with. When it comes to important things like your bank, brokerage account, or your employer’s secret information, a balance is needed between ease of access and security.

That’s where the recently IPO’ed Ping Identity (NYSE: PING) comes in handy. A leader in single sign on and multifactor authentication methods, Ping Identity helps companies with important information make sure that those who access that information should have access to it. The company raised about $188 million in its IPO and is already operating in a cash flow positive way. That combination of positive value generation and a new cash infusion gives reason to believe Ping Identity may see growth in 2020.

In strong economic times, companies often expand by buying new facilities or increasing the sizes of their existing ones. When times aren’t going so well, they often look for ways to tighten their belts, and investments often turn to approaches to save money. That’s what makes Comfort Systems USA (NYSE: FIX) a potentially attractive investment.

The company is a leader in building mechanical systems -- which gives it business in new buildings when companies expand and business in retrofitting when companies look to become more efficient. As a result, it looks capable of surviving and potentially thriving no matter what the economy does in 2020 and beyond. With its shares trading at a reasonable value and closer to their 52 week low than their 52 week high, its stock may recover ground if it proves itself capable of handing the next recession.

ALSO READ: 3 Small-Cap Stocks With Big-Cap Potential

Rent-A-Center (Nasdaq: RCII) is a well-known player in the rent-to-own business. They make its money by having people rent things like furniture, appliances, computers, and electronics, with the promise of ownership of the product at the successful end of the rental contract. The company’s rental prices are such that those who pay off their purchases over the maximum allowed amount of time pay a higher price than those who pay the cash purchase price.

Indeed, a recent check on the company’s website indicated that a refrigerator bought through the company’s rent-to-own program pays around 57% more over the course of two years of payments. Those types of charges are in the neighborhood of credit card rates, with the added protection for the company that it can repossess the products if the renter doesn’t pay it all off on time.

Given the costs and risks involved in rent-to-own contracts, most people who can buy their items another way will buy their items that other way. That means that Rent-A-Center has the potential to do incredibly well if and when people have that many fewer other options. Trading as it does at around 10 times its anticipated forward earnings, Rent-A-Center’s shares have the potential to do well if a rougher economy forces even more people to use it for their big-ticket purchases.

On the flip side to all the recession worry, Kelly Services (Nasdaq: KELA)(Nasdaq: KELB) is in the business of putting people to work. Kelly Services is a staffing company that traces its heritage to the 1940s and helps companies find the help they need when they have more work to do than people to do that work. In good times, that translates to more demand for their services to fill both temporary and temp-to-hire roles, areas in which Kelly Services has decades of expertise.

As long as the economy does keep humming along and employment remains strong, the demand for Kelly Services’ business should also remain strong. With a market price around nine times forward estimated earnings and earnings estimated to grow by around 15% annualized over the next five years, a strong economy could mean great things for this company’s shares.

If you think back to the most recent financial meltdown, housing stood at the center of the crisis that started it all. It was when the housing bubble burst and all the derivatives based on housing blew up that the rest of the issues associated with that crisis really started earnest. It may be out of fear of that history repeating itself that Realogy (NYSE: RLGY) recently traded hands at around five times the company’s anticipated earnings.

Realogy is the company behind relocation specialist Cartus, along with housing brokerages like Century 21, Coldwell Banker, and ERA. In addition to that low price compared to its anticipated earnings, analysts expect the company to increase its earnings by around 20% annualized over the next five years. That combination of low valuation and high anticipated growth rate means the market isn’t expecting the company to deliver anywhere near that level of growth.

As a result, should it actually deliver sustained earnings growth at that rate -- or even get close, for that matter -- its shares have the potential to rise, particularly if the market’s fears prove to be unfounded. Still, it’s important to learn the lessons of the past and recognize that another housing meltdown could well cause problems for Realogy.

Fly Leasing (NYSE: FLY) is an Irish company in the business of leasing out airplanes. That business line is a rather tough one to succeed in over time, as aircraft are both very expensive and very mobile. Since they’re so mobile, they can be moved virtually anywhere in the world in order to meet available demand. Since they’re so expensive, companies are loathe to let their existing capacity sit idle and thus will offer their planes at relatively low prices in periods where supply of rental planes exceeds demand.

That combination means that it’s very hard for companies in that industry to reliably earn a high rate of return over time. Still, since Fly Leasing recently traded hands at around six times its anticipated earnings and around 0.85 times its book value, its shares look as though most of that risk is already priced in. That should give investors reason to believe that they can earn decent returns as long as the company does manage to remain profitable and the economy remains strong.

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The shale revolution has been a key driver of America’s move towards energy independence. Yet for any of that energy to be useful, it needs to move from where it’s produced to where it’s needed to power cities and heat people’s homes. That’s where CNX Midstream Partners (NYSE: CNXM) comes in handy. An energy pipeline partnership focused on the Marcellus and Utica shale plays, CNX Midstream Partners plays a key role in getting all that unlocked energy where it needs to be in order to be useful.

The partnership offers investors a whopping 10% yield, with its distribution well covered by its operating cash flow. That distribution has also grown over time, giving reason to believe that it can continue to pay dividends as long as the shale energy flows strong. Analysts do expect modest earnings growth over the next few years, so there’s a good chance investors can see some growth to go along with that cash payment.

Of course, with its infrastructure focused on the Marcellus and Utica shale plays, CNX Midstream Partners needs to expand in order for its operations to be truly sustainable. After all, shale wells tend to have shorter lifespans than traditional ones, which means production will have to keep moving to where the supply remains, and the pipelines will have to follow.

Chuck Saletta has the following options: long January 2022 $7.50 calls on Realogy, short January 2022 $7.50 puts on Realogy, short March 2020 $5 puts on Realogy, and short March 2020 $10 calls on Realogy. The Motley Fool owns shares of and recommends iRobot. The Motley Fool has a disclosure policy.