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Small-cap stocks faced challenges with the broader market in 2022, but 2023 has been a turnaround year for them. While most people feel that small-cap companies are risky, this segment has abundant investment opportunities. Flying under the radar allows these companies to navigate market volatility more effectively. Additionally, small-cap stocks often have a domestic focus, shielding them from geopolitical shocks and currency fluctuations that impact multinational firms. Here are 7 hidden small-cap gems for you to add to your portfolio:
Miss These, Miss Fortune: Discover 7 Small-Cap Stocks That Could Transform Your Wealth Overnight
- Consol Energy
- Fate Therapeutics
- Compass Minerals
- Guidewire Software
- Enterprise Financial Services Corp
- Vector Group
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Consol Energy is a coal producer and exporter in the United States. The company has benefitted from Russia’s war with Ukraine as Europe hunts for alternative coal suppliers. Consol has been a direct beneficiary of this hunt as demand for its products has zoomed up.
The company recently released quarterly results that reflected this favourable trend. In Q1 2023, Consol Energy achieved a significant turnaround, with GAAP net income reaching $230.4 million, compared to a loss of $4.4 million in the same period the previous year. Adjusted EBITDA surged from $169.2 million to $346.3 million. Revenues also showed impressive growth, rising by 92.1% year-over-year to $688.6 million, beating estimates by nearly $96 million.
Consol Energy is also a solid dividend payer. It announced a dividend distribution of $1.1 per common share, which was 17% of available cash for distribution. An annualized dividend of $4.4 per share offers investors a high yield of 7.52%.
Fate Therapeutics is a small-cap biotech company focused on developing cell-based therapies for cancer treatment. Despite significant volatility in its stock value, with a loss of over 75% in 2022, the company has garnered positive attention from the market due to impressive results from clinical trials. Clinical-stage biotech stocks often exhibit such fluctuations, as the potential rewards are substantial, but so are the associated risks. However, optimistic investors believe that future trial outcomes for Fate’s cancer-targeting therapies, such as FT596, will drive remarkable returns. Revenue for Q1 2023 came in at $59 million. GAAP operating expenses came in at $87.6 million. The company has beaten market estimates in the last four quarters. It has reduced its operational costs and could become a potential multi-bagger.
Compass Minerals produces and distributes vital minerals, operating through two main segments: Salt and Plant Nutrition. With a focus on accelerating growth and maximizing profitability, Compass Minerals is actively pursuing strategic priorities, including expanding into adjacent markets and implementing cost-reduction measures. Additionally, the company has successfully refinanced its debt, improving its debt maturity profile. In terms of financial performance, Compass Minerals has shown significant improvement. Total company operating earnings in Q2 2023 witnessed a remarkable 140% year-over-year growth, reaching $47.9 million while narrowing its net loss to $21.6 million compared to $29.0 million in the corresponding period. Adjusted EBITDA from continuing operations also increased to $77.4 million from $64.8 million the previous year. While the results look good on paper, Compass missed market estimates significantly. However, Compass is taking the proper steps to increase profitability, and this stock should be on your radar for the next few months.
Guidewire Software operates in a very niche industry. It is a software provider that caters to property and casualty (P&C) insurers. The company is currently benefiting from the groundwork laid over the years. It has successfully persuaded P&C insurers to upgrade their outdated core legacy systems to Guidewire’s solutions. And they offer very competitive prices. This has helped the company as the industry is perceived as sluggish, primarily due to its historical reliance on legacy software vendors. In the third quarter of fiscal year 2023 (ending April 30), Guidewire Software reported a narrower non-GAAP loss of 8 cents per share compared to the market’s estimate and the non-GAAP loss of 26 cents from the same quarter in the previous year. The company recorded revenues of $207.5 million, indicating a 5% year-over-year increase. However, revenues fell short of market expectations. That said, Guidewire still has ample room for growth and has already established a strong market position due to the higher costs of switching software providers. In essence, companies that adopt Guidewire are likely to continue to previous systems.
Enterprise Financial Services Corp
Enterprise Financial Services offers individual and corporate customers banking and wealth management services. The company reported a net income of $55.7 million in Q1 2023, an increase of $8 million over the same quarter last year. It has beaten market estimates for the previous four quarters in a row. Taking a conservative and prudent approach, the company allocated only 17% of its profits as dividends last year, allowing for a significant cushion in case of unforeseen events. When a company pays out a smaller portion of its profits as dividends, it signifies a sustainable and manageable dividend. This conservative distribution strategy provides a greater level of security for the dividend in the event of a business downturn. Enterprise Financial Services remains dedicated to generating solid returns for its shareholders while upholding its position as a leading financial institution. The company strongly emphasizes robust corporate governance policies to minimize risk exposure and ensure long-term stability in the market.
Vector Group is a tobacco company that sells cigarettes under multiple brands. It has also diversified into the operation of real estate properties, including hotels and apartment buildings. In the first quarter of 2023, the company posted a 7% increase in revenue, primarily driven by the tobacco segment. The total revenue for the quarter reached $334.1 million, while the earnings per share (EPS) amounted to $0.22. Although it fell short of market expectations, Vector Group has achieved a compound annual growth rate of 19% in EPS over the past three years. Successful long-term investors highly value consistent growth in EPS, as it often translates into a corresponding increase in the company’s share price over time. The company’s shareholders can find reassurance in the ongoing EPS growth trend. Net income for the quarter stood at $34.7 million, marking a 10% increase compared to the first quarter of 2022. Looking ahead, Vector Group is projected to maintain a strong growth trajectory, with an average annual revenue growth forecast of 28% over the next two years. In comparison, the Global Tobacco industry is expected to achieve a growth rate of 4.6%.
Lovesac started by offering customizable seating options, including sac-based seating, modular couches, chairs, and recliners. It expanded into integrated sound systems and accessories like foot blankets, throw pillows, stools, and lap tables. Their products are a hit with DIY home designers. The ‘Sactional’ line of modular couches has gained significant traction in this niche. With a network of showrooms throughout the United States, Lovesac boasts annual sales exceeding $650 million. In Q1 of the fiscal year 2024, Lovesac achieved a solid 9.1% year-over-year growth in net sales and an impressive 15.1% year-over-year growth in comparable sales. Revenue came in at $141.2 million, surpassing expectations by $7.46 million. The biggest highlight for Lovesac was its net cash from operations which came in at $6.2 million compared to a net burn of $21.8 million in Q1 of fiscal 2023.
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