The much-heralded "Trump Trade" has started to unravel. Despite our new President's best efforts, the economic reality of implementing policies has begun to weigh on market sentiment.
Despite 2017 being a successful year for the stock market so far, investors are scrambling to locate the next hot sector and stock. It seems new highs in the major indexes are being hit on an almost daily basis without a significant pull back. At this point, professional investors are asking just how much more upside the market can offer.
The small-cap sector, however, has not kept up with the rest of the market this year. While the S&P 500 is higher by 9%, the small-cap-based Russell 2000 is only higher by about 1%.
Small caps with solid fundamentals riding on developing trends may represent an untapped bastion of upside potential.
5 Small-Caps Poised For Gains
1. MACOM Technology Solutions (Nasdaq: MTSI )
Shares of this analog semiconductor company plunged into the deep value zone on a third-quarter miss, setting up an ideal buying opportunity for forward-looking investors.
Boasting a market cap of just under $3 billion, this Lowell, Massachusetts-based technology company specializes in telecom optical components and data centers. MACOM's primary sources of revenue are split approximately 70/30 between these two segments, respectively.
The stock plunged over 35% from $66 per share to nearly $40 on weakened Chinese demand for telecom optical components. Fourth-quarter projections also missed expectations, with forecasted revenue predicted between $165 million to $174 million and profit projected at $0.45 to $0.50 per share against consensus expectations for $205 million and 76 cents per share.
By focusing on the slowdown in China, bearish investors are not considering the highly bullish factors that make MACOM a strong 'buy' candidate.
First, the Chinese slowdown due to inventory glut is temporary and should improve over time. Next, MACOM's data center business soared by 300% in the last quarter, while overall revenue rose by nearly 37% and gross profit was higher by 25% during the same time frame.
As super-sized internet companies like Amazon and Facebook demand faster and faster data, Macom's optical offerings are the ideal solution. In addition, the Internet of Things' burgeoning demand for radio frequency chips should continue to power revenues long into the future.
2. Myriad Genetics (Nasdaq: MYGN )
Shares of this small-cap genetic testing company just broke out above $27, setting up an ideal buying opportunity for momentum-based investors. The stock price has rallied higher since February to nearly $28 from lows in the $15 range.
The company focuses on hereditary genetic testing for ovarian and breast cancer via the BRCA gene. Myriad held a patent on BRCA that was nixed by the Supreme Court in 2013. Despite this setback, the company maintains an 80% market share in this niche. Myriad's business edge includes the fact that its test is clinically validated and is far more detailed than the competition.
At the same time, the company recently acquired a firm specializing in diagnosing anti-anxiety and depression medication compatibility. Nearly 10 million Americans are diagnosed with one of these conditions annually. The company is barely scratching the surface of this extremely lucrative opportunity. In fact, the potential of this new market easily surpasses the company's core business.
Myriad recently posted fiscal fourth-quarter results, beating estimates while reporting 86% of business is tied to long term contracts. The company represents a great opportunity in the long run.
3. TherapeuticsMD (NYSEMKT: TXMD)
Here's another small-cap biotech company that has set up to be an ideal break-out buy candidate. Shares have been channeling tightly between the 50- and 200-day simple moving averages in a holding pattern waiting for drug approval from the FDA.
TherapeuticsMD specializes in hormonal-based drugs that are bioidentical to the naturally occurring hormones. Focused on treating the symptoms of menopause, the drug was scheduled to be approved in May 2017, and is now expected to be approved shortly. The company's other product, a treatment for hot flashes caused by menopause, is forecasted to be approved in 2018.
The edge the company has in its niche is the bioidentical nature of the drugs. Other treatments require separate prescriptions or compounding of medications. But current legislation does not allow compounding if an FDA-approved similar treatment available. This opens up a tremendous opportunity for TherapeuticMD.
Investors interested in buying this stock should set an order to buy on a breakout above the 200-day SMA and hold for the long run.
4. Red Rock Resorts (Nasdaq: RRR )
Red Rock Resorts operates 22 Las Vegas and Native American-owned casino complexes. Net revenues were higher by nearly 15% in the second quarter year-over-year.
However, the acquisition of Boulder Station and Texas Station leases sent net income lower for the quarter. This sent shares plunging below the 200-day simple moving average towards $21.50 per share. An ideal dip-buying opportunity has developed at the lower stock price.
The company is undertaking a major renovation project that is digging into short-term profits. However, the improved properties will bring significant value enhancements, creating a strong opportunity.
5. Acxiom (Nasdaq: ACXM )
Acxiom specializes in data and analytics for marketing. The company specializes in helping online and traditional advertisers increase their return on investment by becoming more efficient.
The stock has suffered this year with a price drop of over 14%. A loss of $0.02 per share and revenue of $212.5 million posted the latest quarter came in under analyst expectations. Full-year earnings are projected to be 80 cents per share, with revenue in the range of $920 million to $930 million, which if achieved should lift the price.
The stock has dipped from around $27 per share to nearly $23 per share, setting up a great dip-buying opportunity.
Risks To Consider: Volatility is an inherent characteristic of the small-cap sector. Volatility can be both a positive and negative for an investor. Stop loss orders and proper position sizing is particularly critical when investing in small-cap stocks.
Action To Take: Consider adding one of more of the small cap stocks listed above to your investment portfolio.
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