Small-cap stocks are looking attractive now to many investors, including myself. These companies, on the whole, have lower valuations than their large-cap counterparts, meaning they could deliver the needed gains investors seek.
Last year was categorized by an astonishing lack of market breadth, with the Magnificent Seven accounting for almost all of the gains in the S&P 500 and the Nasdaq indices. This year might be when small-cap stocks make up for lost ground, especially since many large and mega-cap stocks already have too rich a valuation for many investors’ tastes.
So, to fully tap into the potential of these types of companies, here are three small-cap stocks presently underappreciated by the market and could be potential multi-baggers in the making.
Lemonade (LMND)
Lemonade (NYSE:LMND) is a technology-driven company in the insurance sector. It uses artificial intelligence (AI) and related tech to dig into data and deliver insights its competitors miss. It has a distinctive use of chatbots for automating the onboarding and claims process, saving customers from long waiting times.
LMND also takes a utilitarian approach to its business model, as it charges a fixed fee to customers as its premiums to cover costs, then pays out the rest for its claims. Unpaid claims are then donated to charity.
Some of its core operating segments are in the homeowners, renters, pets and life insurance industries. Due to its heavy reliance on automation and chatbots, it also uses sophisticated machine-learning algorithms to determine its customer’s risk profiles. That may also remove potential subjective bias while tailoring each package to the individual.
LMND hits all the right notes on the AI, InsurTech and ESG fronts, which could make it appealing to a broad segment of investors. As for financials, its revenues have grown from $22.50 million in Dec. 2018 to $256.70 million in 2022. However, it has also burned through $131.60 million in cash and has yet to report a profitable quarter on both an accounting and FCF basis. Still, it has enough potential to turn itself around, and it currently trades at a very low price-to-sales basis at just 2.8 times sales.
Plug Power (PLUG)
Plug Power (NASDAQ:PLUG) is my favorite contrarian pick and has been for quite some time. The company specializes in producing hydrogen fuel cell systems, primarily used for electric vehicles and other industrial use cases.
PLUG is a (highly risky) contrarian play because there are fears about its ability to remain a going concern, citing major cash burn issues. It has also consistently missed quarterly revenue and EPS estimates.
As expected, PLUG stock is down by 64.7% over the past year and 97.5% since its share hit the market.
However, the company has a few things going for it. Although it’s burning through cash ($1.80 billion over the last 12 months), it does have assets on its balance sheet, a runway, and is producing green hydrogen at its Georgia plant.
It also has deals with Amazon (NASDAQ:AMZN) to supply it with the hydrogen it needs for its vehicles, which could be a major growth driver.
For investors who originally invested in PLUG, it should be noted its venture was always going to be highly risky and uncertain, so issues like these are par for the course when investing in something speculative. Progress may have been slower than expected, but if the core thesis remains intact, so should people’s commitment.
That is because PLUG’s shares are as cheap as lottery tickets (and should probably be considered as such), at just $4.59 per share, with a forward price-to-sales ratio of just 1.7 times sales. For those with an extreme risk tolerance, PLUG is one of those investments that could lead to spectacular returns. Wall Street is collectively betting it will turn its fortunes around (just marginally), with a consensus Buy rating from 24 analysts.
Nano Dimension (NNDM)
Nano Dimension (NASDAQ:NNDM) operates in the 3D printing industry, focusing on additive electronics manufacturing.
NNDM is my pick for investors who don’t like to gamble and want momentum for unlocking gains throughout the year. That is due to the company’s most recent quarterly results.
Notably, the company reported strong revenue growth, 22% organic growth for the quarter, and 33% for the first nine months of 2023. Adjusted gross margins also inflated considerably — up 48% for the first nine months of last year.
The results also came with the CEO reshaping the company’s direction towards cost-cutting and operational efficiency and using its substantial balance sheet to explore M&A deals between other firms. Note that its results have been consistently improving, making it one of those small-cap stocks investors should consider.
On the date of publication, Matthew Farley did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
