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All Contents © 2018The Kiplinger Washington Editors
By Will Ashworth
| June 13, 2018
Both the Russell 2000 and S&P 600 indices hit all-time highs in earlyJune as investors continued to jump on the small-cap bandwagon. Can anything stop small-cap stocks from moving higher over the remainder of 2018?
A recession would halt them in their tracks, but barring the unthinkable, you might want to consider selling some of your large-cap holdings for small-cap stocks or exchange-traded funds because they’re hotter than a pistol. More importantly, they’re an important component for diversifying your equity portfolio.
Which ones should you own? Well, you can look at one of the indexes and pick a few of the stocks, but that’s like trying to find a needle in a haystack.
The second option is to buy an ETF like the iShares Russell 2000 ETF (IWM) or the iShares Core S&P Small-Cap ETF (IJR). However, because this is an article about small-cap stocks, why not go with seven companies that market-beating portfolio manager Jim Callinan likes?
Don’t worry, I’ll pick them for you.
Prices and data are from the original InvestorPlace story published on Jun. 4. Click on ticker-symbol links in each slide for current prices and more.
This slide show is from InvestorPlace, not the Kiplinger editorial staff.
I recently called Zillow Group (ZG) one of the seven best platform stocks to buy. It’s up almost 10% in the two months since but not without a whole bunch of volatility.
While I’d hardly call the real estate platform a small-cap stock at a market cap of $7.5 billion, it certainly is still growing like one.
I first wrote about Zillow in August 2012 about a year after it went public. At the time I suggested that Trulia’s IPO, which Zillow now owns, wouldn’t do nearly as well.
I liked Zillow because it was profitable and Trulia wasn’t. It was that simple.
Although its stock has doubled over the past five years, the best may be yet to come according to Canaccord analyst Maria Ripps.
“We envision a future when Zillow evolves into more of a commerce platform, progressing from its current role as a media property and moving gradually closer to enabling direct transactions,” Ripps wrote in a recent note to clients.
Rather than just connecting buyer and seller, why not handle the entire transaction? That’s a game changer.
If you travel by plane you’re likely aware of Boingo Wireless (WIFI), the company behind free wi-fi in many airports in the U.S.
While that’s where it got its start it’s now the largest operator of indoor wireless networks in America providing wi-fi small cell networks to military bases, stadiums, universities, etc.
How does Boingo make money?
“Typically the venue will give us long-term rights. They may pay us to operate a network. The cellular carriers may pay us. And then we went into other types of venues, and we figured out other ways to monetize,” CEO David Hagan said in a 2017 interview. “We have advertising. We have partners pay us for access. So another way to monetize that free network is American Express pays Boingo; to their cardholder base, it’s free.”
In terms of profitability and sales, Boingo’s adjusted EBITDA margins have doubled since 2014 and its revenues doubled over the past seven years.
Interestingly, advertising now accounts for 27% of its overall revenue up from just 5% in 2011. As a business it’s revenue streams are far more diversified and balanced then they were seven years ago.
The real potential lies in retail where malls are doing everything they can to attract customers including providing free wi-fi. As malls become more experiential, I can see Boingo’s business taking off from this area alone.
The fitness industry is a terribly fickle business. It’s bad enough that you have to rely on the inner strength of your customers to keep the revenue flowing, but it’s also highly competitive which makes it difficult to stand out in a crowded marketplace.
Planet Fitness (PLNT) makes money from three areas: franchising fees, revenues fro, corporate-owned locations, and the sale of fitness equipment to its franchisees.
In the first quarter, its 1,497 franchised locations generated 45% and 77% of the company’s overall revenue and EBITDA. Each of its three operating segments experienced double-digit revenue and EBITDA growth year over year.
When it announced Q1 2018 earnings in early May its stock dropped around 4% on lower than expected guidance for the rest of the fiscal year. It projects 20% revenue growth; analysts are expecting 22%.
Over the past 12 months, Planet Fitness has opened 194 franchised locations as well as 10 company-owned stores. With only 68 company-owned stores, consider them more of a training ground for franchisees as well as a platform for testing new products and ideas.
In the first quarter, its franchisees delivered same-store sales growth of 11.4%. Whenever you’ve got double-digit comps you’re doing something right.
Free cash flow positive, I’d head to a location near you to find out more.
If it’s good enough for Warren Buffett, it’s good enough for me. No, Berkshire Hathaway (BRK.A,BRK.B) doesn’t own Cavco Industries (CVCO), but it does own Clayton Homes, a builder of modular homes, manufactured homes, tiny homes and other types of housing.
Cavco is one of Clayton Homes’ competitors. It builds a similar group of products through a number of different brands. In fiscal 2018, Cavco’s revenues and net income grew by 12.6% and 61.8% respectively to $871.2 million and $61.5 million.
Like a lot of businesses who generate all of their income in the U.S., Cavco will benefit from the lower corporate tax rate. In Q4 2018, which ended March 31, the company’s effective tax rate was was 600 basis points lower at 27.9%. Look for that to continue to drop in fiscal 2019.
In its Q4 2018 press release, CEO Joseph Stegmayer was optimistic about the company’s growth in the coming year.
“Fiscal year 2019 begins with optimism about demand for housing as homeownership rates, currently at a low 64.2%, are reported to be trending higher,” stated Stegmayer. “With housing prices and rental rates also on the rise, we believe systems-built housing will be an increasingly sought after option for affordable living.”
The best businesses save people time and money. Considering a home purchase is the biggest purchase most people make in their lives, providing a cheaper alternative will always be attractive to consumers.
Is it just me or does the weight-loss company seem to have been around forever? I can remember all the negative stories surrounding Medifast (MED) back in 2009 that suggested it was a pyramid scheme.
“Chief executive officer Michael McDevitt claims the sales growth at Medifast is due to the successful execution of the company’s diverse multi-channel distribution strategy,” wrote MoneyWatch contributor David Phillips in September 2009… “Detractors allege, however, the company’s growth is attributable to nothing more than a twist of the notorious Ponzi postage stamp con of 1921 — a modern day, multilevel pyramid scheme.”
You know what they say about your reputation? It’s easier to get a bad reputation than it is to lose one.
Medifast once traded as high as $260 back in the early 1990s. Then it traded below $10 for the better part of a decade until taking off in 2009; it’s up 7,056% in the eight years since.
Given all the excitement over Oprah’s involvement with Weight Watchers International, Inc. (WTW), a stock I recommended at $36 last August, I’d say Medifast’s worth a look.
Of all the small-cap stocks on my list, PRA Group (PRAA) would have to be my dark horse pick of the bunch.
It’s not that I don’t think the buyer of nonperforming loans provides a legitimate service for banks and other institutions hoping to recover funds lent to delinquent parties, it’s just that it reminds me of a boiler room operation where low-paid employees are dialing for dollars.
With the changes to FCC rules regarding telemarketing practices, it seems like a near-impossible task to collect on delinquent accounts but I guess that’s why the business exists in the first place.
At the end of Q2 2018, PRA Group had $5.8 billion still to collect with about 55% of that in the U.S. and the remainder in Europe and the rest of the Americas.
PRAA stock is down significantly since hitting all-time highs in 2015 on lower earnings. It continues to acquire large portfolios of nonperforming loans while adding more staff so that it can start turning more of its collections into profits.
Only aggressive investors should consider this stock.
I’m an animal lover who’s seen first hand (my wife and I have five rescue cats) how lucrative the pet industry is whether we are talking vet costs, pet food, pet sitting, grooming, etc.
It’s massive catching the attention of entrepreneurs and big businesses alike. Campbell Soup Company (CPB) wouldn’t have dished out $8 billion if it didn’t think there was big money to be made in the pet industry.
PetIQ (PETQ) unlike some of the businesses on this list is truly a small-cap stock. In fact, with a market cap of less than $500 million, I think it’s fair to call it a micro-cap stock.
No matter. PetIQ is growing its business and that’s what’s truly important. It makes products that run the gamut from flea and tick treatments to specialty dog and cat treats.
However, it’s the January 2018 acquisition of VIP Petcare for$220 million — a leading provider of veterinary services within pet retailers across the country — that is going to send its stock higher.
The acquisition of VIP closes the circle bringing the end-user customer closer to the company providing a much better understanding of their needs and wishes.
Although it’s a cliche, this is a game changer.
This article is from Will Ashworth of InvestorPlace. As of this writing, Ashworth did not personally hold a position in any of the aforementioned securities.
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