An underappreciated edge individual investors possess? The agility to delve into small-cap stocks without influencing market dynamics – an impossible feat for the largest and brightest funds on Wall Street.
Traditional financial wisdom, however, champions mega-caps as the path to stock market returns.
A deeper dive reveals that small caps can match their mega-cap counterparts when it comes to stability. The small-cap universe has stocks of all criteria: growth, dividend, value, turnarounds – you name it.
Historically, small-cap stocks tend to outperform large-cap stocks. Scholars have labeled this phenomenon the “size-effect,” tracing its origins to more modest attention from the press, Wall Street analysts and large investment funds. This dynamic often results in a delayed or dulled market response to news or operational improvements for small-cap stocks, sometimes allowing individual investors to perform information arbitrage.
While the world of small-caps offers additional risk, the right investor can also achieve superior returns. For those keen to exploit the small-cap anomaly, these six stocks are worthy of your consideration. Whether you’re tapping into the hot artificial intelligence industry or looking to play a turnaround, this curated list caters to a diverse range of investment appetites:
|YTD Gain (as of Sept. 7 close)
|WW International Inc. (ticker: WW)
|Shutterstock Inc. (SSTK)
|Intapp Inc. (INTA)
|International Seaways Inc. (INSW)
|Xponential Fitness Inc. (XPOF)
|Winnebago Industries Inc. (WGO)
WW International Inc. (WW)
Sector: Consumer cyclical
Market value: $840 million
YTD return: 190.9%
WW International, better known as WeightWatchers, is a poster story for digital disruption. With competitors releasing free apps like MyFitnessPal and easily accessible internet weight loss information, the company’s core business of weight loss support has become a melting ice cube.
The stock has declined over 90% from 2018 highs, relegating it to a market cap of $840 million. Most agree – the company’s best days are behind it.
However, in a strategic pivot, the company is tapping a massive growth lever by entering the GLP-1 weight loss drug market. The company acquired telehealth provider Sequence, which prescribes the widely discussed Ozempic, prescriptions of which can cost north of $1,000 per month.
This is a massive catalyst for WW’s bottom line. The insatiable demand for this expensive “magic cure” in GLP-1 drugs is so high that Ozempic creator Novo Nordisk ADR (NVO) has a market cap that is closing in on the gross domestic product of its homeland, Denmark.
Perhaps the market thinks WW can get a piece of that demand, too. WW stock has risen 190% since the acquisition announcement on May 6 and the rise in market cap has paid for the $132 million acquisition price nearly four times over.
Sector: Communication services
Market value: $1.4 billion
YTD return: -22.5%
Shutterstock’s bread and butter, licensing images and videos, looks vulnerable with the threat of artificial intelligence looming. However, the narrative isn’t as straightforward as some might suggest.
With cutting-edge generative AI tools like Stable Diffusion creating lifelike visuals at no cost, it raises significant questions about Shutterstock’s traditional business model. And this shift has put the company at the center of the AI debate. The verdict thus far is negative, with SSTK shares retreating nearly 23% this year.
Yet, the company inked a strategic alliance with OpenAI, the creators of ChatGPT. As per the agreement, OpenAI will train its models on Shutterstock media assets while providing Shutterstock with early access to models and proprietary tools. In this way, Shutterstock can become a formidable AI player in its own right.
This presents a dichotomy for Shutterstock. On one hand, AI innovation challenges the company’s foundational licensing model. Conversely, the firm’s massive media library and OpenAI partnership make it a viable player in the AI industry.
As Bank of America’s inclusion of SSTK in its top 20 AI stocks indicates, Shutterstock’s future might be more multifaceted than a mere licensing platform.
Market value: $2.4 billion
YTD return: 42.7%
Intapp stands out among the crowded cloud software marketplace for its specialization in a highly profitable but difficult-to-serve market: professional and financial services.
Unlike horizontal software solutions, Intapp’s offerings, like DealCloud, are tailor-made for its target industries while navigating the evolving needs and regulatory compliance of highly regulated industries.
Intapp’s specialization presents a barrier to giants like Salesforce Inc. (CRM). The intricate direct sales process required to serve its customers creates a massive barrier to entry for anyone trying to eat their lunch. While the company doesn’t have the scalability of Adobe Inc. (ADBE) or Salesforce, it has a defensible moat with plenty of growth potential.
The company is growing like a weed, too. It reported 32% year-over-year sales growth in its recent earnings report while increasing revenue at a 17% compound annual growth rate over the last five years.
The stock is already up 42.7% in 2023, and that comes after a significant pullback from its high water mark.
International Seaways Inc. (INSW)
Market value: $2.1 billion
YTD return: 21.7%
The supply constraints in the oil tanker market have delivered lucrative returns for tanker firms in the past couple of years. The global tanker fleet remains tight as shipyards continue to lag in delivery schedules. Energy efficiency regulations serve to slow things down even more, ensuring continued low inventory across the industry.
The upshot is that if oil demand doesn’t fall off a cliff, tanker firms like International Seaways should continue to post stellar shareholder returns through dividends and share buybacks.
INSW is a standout prospect. The company trades for just four times forward earnings, has a strong balance sheet and aggressively returns capital to shareholders through special dividends and share buybacks.
Shares have surged 21.7% year-to-date, and its recent earnings report indicates more room for upside.
Xponential Fitness Inc. (XPOF)
Sector: Consumer cyclical
Market value: $950 million
YTD return: -16.1%
Xponential Fitness, a burgeoning player in the niche fitness world, has tailored its strategy to thrive in an era where boutique is better. Its compact studios are designed for specialized workouts, ranging from Pilates to yoga to rowing.
The streamlined model is part of XPOF’s allure. Each location occupies a modest 2,000 square feet on average, markedly less than conventional gyms, minimizing equipment and staff costs.
XPOF has also been able to attract franchisees with the ease of insertion into small retail locations, reducing startup challenges. The low startup requirements combined with its franchise-based model have enabled the company to grow revenue at over 20% annually for the past five years. XPOF’s studio count swelled from 817 in 2017 to 2,892 in 2023.
The growth and success of XPOF positions it as an attractive way to invest in the boutique fitness trend – which is chipping away at the revenue base of big box gyms like LA Fitness.
However, it’s not all smooth sailing. The stock is down 16.1% year to date, a downturn influenced by a short-seller report highlighting red flags at the company. But the pullback allows you to scoop up shares for a bargain if you’re willing to take some risk.
Winnebago Industries Inc. (WGO)
Sector: Consumer cyclical
Market value: $1.9 billion
YTD return: 19.3%
Winnebago is one of the largest producers of recreational vehicles, or RVs.
The company had a pandemic boom, as remote workers got on the road in RVs and vans and truly embraced the “work-from-anywhere” lifestyle. It more than doubled its revenue, going from $2 billion in 2019 to $4.9 billion in 2022.
But as the economy slows down and workers return to the office, that growth is returning to earth, and the stock has hardly budged since 2021.
Although Winnebago’s hyper-growth is behind it, revenues remain above pre-pandemic levels. Rather than being a period of one-off growth, WGO used the period to grow its market share and acquire competitors.
That’s why Wall Street analysts expect the company to earn $7.57 next year, more than double its 2019 earnings. At current levels, the company trades at roughly eight times next year’s earnings, creating an attractive entry point for value-minded investors.