Two Small-Cap Names to Buy and One to Avoid

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. Along 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 the task of finding the right small-cap stocks more difficult.   

Fortunately, for our readers looking 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 year’s second half.  

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Analysts expect a torrid pace of profit growth over the next few years for Chart Industries (GTLS), which manufactures cryogenic equipment for industrial gasses such as liquefied natural gas (LNG).   Indeed, the Street forecasts compound annual EPS growth of more than 34% over the next three to five years.

In the near term, the company is benefitting from the growing demand for LNG caused by Russia’s invasion of Ukraine. Geopolitical turmoil helped GTLS gain 6% for the year to date, outperforming the large-cap Dow Jones Industrial Average, which has lost 13% in the same period.  

Zooming out, LNG gives long-term-minded GTLS investors exposure to the global secular trend toward sustainable energy. Analysts say the company’s unique portfolio of technologies gives it an edge in the growing industry. BTIG analyst Gregory Lewis says the company is “threading the needle” and “expanding into the right places at the right time” by balancing its core industrial gas business and energy transition exposure with bolt-ons and partnerships across hydrogen, and carbon capture, water treatment, and specialty gasses.

“Chart offers multi-pronged, highly attractive and direct exposure to the energy transition with its core base of industrial gasses and LNG-related products,” Read writes. The analyst believes the company is “among the leaders in providing critical equipment and supplies for the rapidly expanding hydrogen and CCUS rollouts during the 2020s and likely well beyond.”  The analyst recognizes both the short- and medium-term valuations “appear stretched by conventional metrics,” he thinks elevated multiples are appropriate given that its “key markets are on track to more than quintuple by the end of the decade.”  

Most of the pros on Wall Street agree that this energy transition stock is a Buy now.   Of 17 analysts offering recommendations for Chart Industries, 14 rate the stock a Buy, and 3 call it a Hold. There are no Sell ratings for the stock. A median price target of $205 represents a 26% upside from Wednesday’s closing price.

Special purpose acquisition companies, in general, had a weak performance in 2021. Our next 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 is one stock to watch.  

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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 monetizing 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 the year 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, which was forecast in its investor presentation. Small-cap Spire’s share price is down 93% from its ATH from September of last year and down 61% so far this year.

Fintech company Upstart Holdings (UPST) management lowered its full-year guidance last week when it posted disappointing preliminary second-quarter results, sparking yet another sell-off for the stock. UPST’s share price is down more than 90% from its October ATH, and it may have more to go as bank partners tighten their fists.  

Institutional lenders are less willing to fund Upstart’s loans than ever, and it makes sense for backers to be cautious in the current macroeconomic environment. Rising interest rates will continue to pressure consumers, leading to more defaults. Upstart is especially vulnerable as its AI models have yet to be tested during a significant down period in the credit cycle.  

In the preliminary Q2 report, management cited another reason for the lower outlook. Upstart more than doubled the amount ]of loans it funded with its own cash in just a single quarter. At the end of Q1, the company held $600 million in loans on its own balance sheet, up from $250 million in the previous quarter, severely exposing its balance sheet to credit risk at what could be the worst possible time.  

Previously, Q2 guidance called for $300 million in revenue and a net loss of $2 million. The company now estimates $228 million in revenue and a net loss of $29 million. That implies revenue growth of roughly 18%, representing a sharp deceleration from the quadruple-digit revenue growth delivered in Q1 2021. With growth momentum slowing while competition in the space is simultaneously growing, UPST is one small-cap name to stay away from for now. 

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