Two Small-Cap Names to Consider and One to Avoid

As the market adjusts to a more stringent central bank, investors continue to move away from high-priced growth names in search of undervalued stocks.  But after the rotation out of growth and into value exploded, the job for bargain hunters is more complicated.   

Anyone looking for companies trading for cheap valuations relative to their earnings and long-term growth potential would do well to expand the search to small-cap investments, which seem much more appealing right now than their large-cap counterparts.  

“While large and mid-caps trade at a 35%-40% premium to history, small caps now trade in line with history,” said Jill Carey Hall, equity and quant strategist for BofA Securities.  “In addition to being the least expensive, they are also a better diversifier. … While asset class returns have grown more correlated vs. 20 years ago, the [small-cap] Russell 2000 is less correlated with other asset class returns on average than the Russell MidCap or S&P 500 both over the last three years and the last few decades.”

Small-cap investing is not without its drawbacks.  With higher returns, stocks with relatively low market capitalizations are typically more prone to wild swings than their large-cap counterparts.  Small-cap companies also tend to be less established, making finding the right small-cap stocks more difficult.   

Fortunately, for our readers who want to take a deeper look into the small caps currently gaining attention, our team has done some of the legwork for you.  In this article, our team discusses two small-cap names to consider and one to avoid for the second half of the year.  

---

---

Special purpose acquisition companies, in general, had a weak performance in 2021.  Our first recommendation is one of the companies that stumbled out of the gate but has potential so vast that it should not be ignored.  With an industry-wide acceleration likely this year and several other tailwinds forming, this small-cap is one stock to watch.  

Leading global provider of space-based data, analytics, and services, Spire Global Inc. (SPIR), had been in business for nine years before the company went public via SPAC merger in 2021.  After stumbling out of the gate and lowering guidance in its first quarter, the stock has fallen 85%, creating a possible buying opportunity for anyone looking to get in on a pure-play space company at a low price. 

The space industry is still in its early stages of development, making space investing speculative and risky.  As a pioneer, by the time SPIR made its way to the New York Stock Exchange, its global satellite infrastructure had been fully deployed for some time – and operating at a very high scale.  

The company has more than 110 satellites currently in orbit, collecting powerful insights about Earth and sending them to Spire’s 72 antennas at ground stations in 16 countries.  Terabytes of data are then processed and shipped to hundreds of customers worldwide, giving commercial and government organizations the competitive advantage they seek with insights from space.  Spire’s subscription-based business model provides predictable income for the monetization of that data, where an annual subscription can cost anywhere between tens of thousands of dollars to the very high millions.  

Spire notably booked $43.4 million in revenue in 2021 and ended with nearly $71 million of annual recurring revenue, representing 96% year-over-year growth.  By 2025 the company expects to expand its customer base and reach $1.2 billion in revenue, as forecasted in its investor presentation.  Small-cap Spire’s share price is down 86% from its ATH from September of last year and 51% so far this year.

---

---

Yesterday, the CDC announced it has stepped up its monkeypox alert to level 2, urging travelers to take extra precautions as global cases surpass 1,000.  Our following small-cap recommendation has been gaining attention as concerns about monkeypox outbreaks worsen in the U.S. and around the globe.  

The small-cap vaccine maker Siga Technologies (SIGA), whose research has mainly been funded by the U.S. government to address the threat of biological weapons, has developed an antiviral known as tecovirimat or TPOXX, which the European Medicines Agency recently approved not only for monkeypox but also for cowpox and smallpox. 

 “As you might imagine, a number of the jurisdictions where cases are being found have contacted us and are interested in acquiring the drug as soon as possible,” Dennis Hruby, chief scientific officer at Siga Technologies, previously told Euronews Next. “Our drug will stop further progression of the disease and then allow your natural immune system to kick in and eradicate the virus,” he added. 

On May 19th, the company announced that it had earned FDA approval for the intravenous form of TPOXX for the treatment of smallpox, calling the IV formula “an important option for those who are unable to swallow the oral capsules of TPOXX.”  Oral TPOXX is already being administered in the US, Canada, and Europe to treat smallpox, and the IV formulation was recently cited in the U.S. president’s budget request as being used to treat a patient in the U.S. with monkeypox, the company noted.

SIGA’s share price has gained 40% over the past month.  With TPOXX gaining hold around the globe and plenty of untapped potential, we’ll be keeping an eye on this small-cap in the weeks to come.

---

---

Surging house prices have made buying a home significantly less affordable. At the same time, the Federal Reserve has signaled its intention to raise interest rates aggressively to counteract inflation. That’s driven mortgage rates above 5% — the highest they’ve been in over a decade.  These trends are beginning to weigh on demand for real estate services which could exacerbate Redfin’s (RDFN) pre-existing profitability issues.

Competition on home offers written by Redfin agents has been on the decline since February. April’s bidding war rate was 61%, down from 63% a month earlier and 67% a year earlier—as surging mortgage rates prompted buyers to drop out.  The plunge in homebuyer competition is just one sign that the housing market is beginning to slow down.  Online housing searches and home tours are also declining, and more sellers are lowering their asking prices.

“Most homebuyers are still encountering bidding wars, but competition is beginning to cool because surging mortgage rates and home prices are prompting some Americans to back out or put their buying plans on hold,” said Redfin Chief Economist Daryl Fairweather. “We expect bidding wars to ease further in the coming months as rising mortgage rates price more buyers out of the market.”

If housing sales slow, Redfin could struggle to integrate its recent acquisitions, such as mortgage lender Bay Equity Home Loans, which could stunt its growth and add to its profitability issues. The current consensus recommendation is to Hold RDFN.  We’ll steer clear of this small-cap stock until conditions improve.