If you’ve ever wanted to invest in the next Amazon, then small-cap stocks are likely a good option for you. These companies have higher growth potential, which makes them attractive opportunities, even though their stocks can be more volatile and investors face greater risks.
A small-cap stock is a share of a company whose market capitalization ranges between $300 million and $2 billion. The market capitalization is determined by the number of outstanding shares multiplied by the current stock price. What are the best small-cap stocks to buy now?
What are small-cap stocks?
Small-cap companies are comparatively smaller in size but offer huge growth potential. Small-cap stocks are risky because of the low probability that they will be successful over a period of time. This makes small-cap stocks volatile in nature compared to larger companies' stocks.
Small-cap stocks have the ability to emerge as multi-baggers by generating more than 100 percent returns. These stocks often prove to be outperformers over a longer period of time.
Best small-cap stocks to buy now
Certain small-cap stocks are good for investors to buy now, including:
- Super Micro Computer (SMCI)
- Ichor Holdings (ICHR)
- CarParts.com (PRTS)
Super Micro Computer is an IT company based in California. The company is expected to benefit from the surge in the cloud, artificial intelligence, and 5G applications. Currently, Super Micro has a market capitalization of $1.8 billion. The company also has around $270 million in net cash. The stock is trading at an NTM EV-to-sales multiple of 0.4x, which makes it very cheap.
Ichor Holdings manufactures critical fluid delivery subsystems for semiconductor production equipment. Ichor has a market capitalization of $1.3 billion and a solid net cash position. The stock is trading at an NTM EV-to-sales multiple of 1.1x. That’s cheap because the company will likely benefit from the surge in demand for chips across various applications like cloud and 5G.
CarParts.com is an online auto parts company. The company’s sales have surged amid the coronavirus pandemic. Cash-strapped customers chose to repair existing vehicles instead of buying new ones. CarParts.com’s gross margin rose for six quarters in a row, which highlighted that the company is becoming more efficient and profitable. The company’s turnaround efforts should continue to drive growth even after the coronavirus pandemic.
Small-cap stocks are risky
Although small-cap stocks generate higher returns, they come with a significant risk burden. These stocks are ideal for investors with a high-risk appetite because they carry a high risk-return tradeoff. Small-cap companies tend to underperform during recessions because they generally don’t have the same resources as large-cap companies and they aren’t market leaders who can easily withstand unforeseen crises.
Small-cap companies can’t borrow money as simply as large companies. They don’t have enough cash on hand and will likely have negative cash flows. They also have less certain long-term growth prospects. A small company might have a terrific product or technology, but it will fail eventually if it doesn’t have as much cash to introduce the product to market and attain profitability.