Small Is Beautiful Again: 100 High Performance Small Cap Stocks
By Hank Tucker, Antoine Gara and Eliza Haverstock
Ask just about any investor from Silicon Valley to Wall Street and they will tell you: We’re living in the age of the mega-corporation. Trillion-dollar mega cap quasi-monopolies like Google, Apple and Amazon are pushing into everything from autonomous driving and entertainment to financial services and healthcare. And judging from their stock prices, the bigger these companies get, the more Wall Street applauds.
But being small, specialized and great—a hedgehog among foxes—is still a recipe for success, especially in a recovering economy.
Take Collectors Universe, a $700 million market capitalization company that grades collectibles like baseball cards, rare coins, stamps and autographs. It is the authenticator of millions of memorabilia items, like Mike Trout’s rookie card, Ted Williams’ autograph and 19th-century Morgan silver dollars. In the collectibles market, the Santa Ana, California-based company acts as Moody’s, Sotheby’s and eBay all rolled up into one as customers rate, bid and sell using its services. The wealthy around the world, flush with capital and eager to diversify their holdings, have flocked to the high-end memorabilia market and Collectors Universe is booming. In 2020 it’s expected to hit $100 million in revenues, up from $79 million in 2019.
Collectors Universe has recently become a collectible itself. On November 30, just as he was putting the final touches on his purchase of the New York Mets, billionaire Steven A. Cohen’s family office announced that it was part of a group acquiring the small company at a 30% premium to the market. Shares of the company have skyrocketed 240% already this year and have returned an annual average of 20% for the past decade. It’s the kind of return that even the most successful members of the S&P 500 would envy.
Such is the value of being small and great. Since September, small cap stocks have been undergoing something of a renaissance on Wall Street. The Russell 2000 has gained 18% in the last three months versus 5% for the S&P 500.
Forbes analyzed more than 850 companies with market capitalizations ranging from $300 million to $2 billion to produce our ranking of America’s 100 Best Small Cap Companies. Our selections are based on four factors: trailing 12 month stock returns, sales growth, earnings per share growth and return on equity. (Click here for the full list). As we went to press, Collectors Universe got snapped up, but there are dozens more ripe for investment. Many are names you have never heard before. Our top company, for example, is a San Antonio-based company called XPEL. It generated $130 million revenues last year from selling protective films and window tints for cars.
About a third of the companies on our list are biotech and pharmaceuticals, and many have generated eye-popping returns. San Diego’s Cardiff Oncology has risen close to 3,000% since March after reporting promising clinical data for its drug to treat colon cancer, prostate cancer and leukemia.
Others are just as promising. Online pet pharmacy PetMed Express (also known as 1-800-PetMeds) experienced a 20% jump in sales in the second quarter, the first full quarter during which the coronavirus dominated day-to-day life. A boom in pet adoptions and vet clinic closures delivered 186,000 new customers to PetMed Express, a 33% year-over-year increase.
“No one wanted to go out to their vets. No one wanted to go to pet stores,” says Bruce Rosenbloom, PetMed Express’ chief financial officer.
Rosenbloom says prescription pet medication is a $3.2 billion industry, with 80% of those sales coming straight from veterinarians. The rest is split among online competitors, and 1-800-PetMeds is the biggest and most established player in that space. Its average customer pays $87 a year for medications like monthly heartworm, flea and tick preventatives. PetMed Express earned $81 million on $284 million in revenues last year.
PetMed Express shares have cooled since the initial Covid surge, but remain up 23% this year. Analysts reckon that the surge in adopted pets will keep the orders flowing to the Delray Beach, Florida company long after virus lockdowns are in the rearview mirror.
Another great company ranked fifth on our list is Plano, Texas’ Green Brick Partners. It would be hard to find a collection of real estate assets better suited for the Covid-19 pandemic. The company, which sits on thousands of residential lots in the fastest-growing geographies of the country, is controlled by famed hedge fund short seller David Einhorn. Those fleeing cities or blue-state taxes are likely to land on one of Green Brick’s lots.
Once an obscure, micro-capitalization public company selling biofuels, Einhorn has remade it into a homebuilding company. Little-known Green Brick is now one of America’s fastest growing residential developers, with nearly 4,000 lots in development in states like Georgia, Texas, Florida and Colorado drawing in city dwellers during coronavirus. Shares have soared over 90% in 2020 as its home sales revenues near $1 billion.
“Housing appears to be a major beneficiary from the pandemic, as low rates combined with an expanded preference for single family detached housing has spurred demand,” Einhorn recently told his investors in a quarterly letter. “We believe the shares remain deeply undervalued at 9-times forward earnings estimates, as business momentum continues to accelerate.”
Clearwater, Florida’s MarineMax is another pandemic opportunist. Annual boat sales are expected to end 2020 on a 13-year high, according to the National Marine Manufacturers Association. Think of MarineMax as Carmax for boats. It today operates 77 dealerships primarily along the eastern seaboard that cater to a wealthier crowd: the average vessel sells for $200,000, with some running more than a million bucks. In the quarter ended September 30, MarineMax revenues shot up 29% to nearly $400 million, and $1.5 billion for the fiscal year. MarineMax’s market cap has doubled since January.
“There was a lot of money that wasn’t being spent on European travel, and that was money that they could spend on something else,” says CEO Brett McGill. “So many new people have come into boating this summer… It’s a numbers game and it’s infectious. It’s very rare you see people get in and out for one year.”
Some of the companies on our list are innovative tech companies, though not yet unicorns.
ShotSpotter is a Newark, California company with a market capitalization of $384 million. It sells gunshot detection technology to local police departments. Its acoustic sensors automatically alert officers when shots are fired, pinpointing criminal activity in progress. CEO Ralph Clark says up to 95% of incidents of gunfire go unreported, and his company’s technology helps reduce violent crime by identifying trouble spots in real time.
“The problem that a lot of police departments have is over-policing and under-serving,” Clark says. “We try to get that balance right by using technology to have very precise law enforcement interventions.”
ShotSpotter’s technology now covers more than 700 square miles in 100 U.S. cities including, Chicago, New York, Trenton and St. Louis. It doesn’t have any direct competitors, giving it power to set its own prices. In the third quarter of 2020, it turned a $566,000 net profit on $11.4 million in revenue—its sixth straight quarter in the black.
For more successful small caps, see our full list of America’s Best Small Companies.