When the curtain finally closes on 2020, it'll undoubtedly find its way into the record books. The volatility we've witnessed this year is unprecedented, with a five-week plunge in the broad-based S&P 500 wiping out more than a third of its value, and the subsequent five-month rally from the March lows gaining everything back, and some.
While unsettling for long-term investors, this volatility proved to be a blessing in disguise. That's because it allowed folks to buy into high-quality businesses on the cheap.
However, periods of heightened volatility also have a tendency to encourage young and/or novice investors to day-trade and make wild gambles on penny stocks (i.e., highly speculative companies with very small market caps and/or share prices). We know this to be true by looking at data from online investing platform Robinhood.
Most people know Robinhood as being one of the pioneers of commission-free trading. It also parses out free shares of stock when people sign up for an account. Since its services became available to the public five years ago, the company has done a particularly good job of courting young and novice investors.
Don't get me wrong, encouraging young people to put their money to work in stocks early in life is a fantastic thing. Unfortunately, Robinhood isn't giving these investors the tools or knowledge to see how powerful long-term investing and compounding can be over time. As a result, Robinhood's leaderboard (i.e., its most-held stocks by members) as of mid-August was littered with penny stocks and other awful companies.
But there is hope for Robinhood investors who have an attraction to small stocks. Although most small-cap and penny stocks are tiny for a very good reasons, there are a handful of hidden gems among the bunch. Here are three tiny stocks that Robinhood investors should be buying.
One small company that should be given a lot of attention by investors is furniture maker Lovesac (NASDAQ: LOVE). Yes, I did just say "furniture maker."
While most furniture companies are slow-growing, stodgy businesses that are highly cyclical, Lovesac is nothing of the sort. That's because its furniture caters to a more modern, younger buyer, which also happens to be what Robinhood's investment platform caters to. This focus on foam beanbag chairs, "sactional" furniture, and accessories that provide utility beyond just looking good in a living rooms, has been the guiding principle to the company's rapid growth.
In early June, Lovesac reported its fiscal first-quarter operating results, and suffice it to say, the company blew away expectations. Despite much of the country being shut down by the coronavirus disease 2019 (COVID-19) pandemic, which included its physical showrooms, Lovesac grew net sales by nearly 33% and delivered comparable sales growth of 50%. This included a 32% comparable sales decline from physical showroom sales and a jaw-dropping 258% increasing in comparable internet sales from the prior-year period. This speaks to how well Lovesac's products are resonating with buyers, and it confirms that consumers are more frequently buying sets or matching accessories. All told, the company's Q1 net loss actually shrank by $0.8 million to a loss of $8.3 million from the prior-year period.
According to Wall Street, Lovesac is on track to practically double its full-year sales over the next four years to $462 million by 2024. That's growth rarely seen among furniture manufacturers and retailers, which is what makes Lovesac such an intriguing buy.
Another tiny stock that Robinhood investors should consider buying hand over fist is cannabis-focused U.S. multistate operator (MSO) Jushi Holdings (OTC: JUSHF). At a market cap of $214 million and a $2 share price, it might as well qualify as a microcap or penny stock.
On a macro level, marijuana is projected to be one of the fastest growing industries in the U.S. this decade. Even if the federal government doesn't alter its classification of marijuana as a Schedule I (i.e., illicit) substance, state-level legalizations are providing more than enough organic growth potential for MSO's like Jushi.
Since young investors gravitate to growth stocks and favor the legalization of cannabis, they're going to love Jushi. In June, the company had an annualized sales run-rate of $69 million, but the company forecast between $200 million and $250 million in full-year sales for 2021. Although most of this growth is from the opening of new stores in core locations in Pennsylvania and Illinois, existing dispensaries in these states are delivering incredible year-on-year sales growth.
As you might imagine, Jushi is spending aggressively to secure significant market share in Pennsylvania, Illinois, and Virginia, and has been losing money on a quarterly basis, thus far. But the company expects to turn to the corner to positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) by the fourth quarter of 2020. Positive adjusted EBITDA would suggest that recurring profitability isn't too far behind.
One little snafu that should be mentioned is Jushi is an over-the-counter (OTC)-listed stock, and Robinhood investors can't buy OTC-listed stocks on the Robinhood platform. The good news is there's an easy workaround. A host of brokerages will let you buy OTC-listed companies, and many don't have minimum deposit requirements. That makes Jushi an easy addition to the portfolios of Robinhood investors via a separate brokerage.
A final small stock that Robinhood investors can get excited about is mobile technology-solutions provider CalAmp (NASDAQ: CAMP). At a $295 million market cap, it falls right in between Jushi and Lovesac.
First off, yes, there are still tech stocks you can buy that aren't valued at an obscene premium to earnings or cash flow despite significant long-term growth potential. CalAmp is evidence to this fact. Of course, CalAmp has also struggled a bit recently, with the U.S.-China trade war weighing on sales, and uncertainty surrounding the coronavirus pandemic prompting clients to wait on orders.
However, there's good news to be had among these struggles. CalAmp has significantly reduced its reliance on China for telematics products in recent quarters, with the company now leaning on America's top economic rival for about 50% of telematics solutions. For context, CalAmp had been leaning on China for as much as 80% of its telematics products prior to the trade war. This ongoing shift should substantially desensitize CalAmp to further trade war disruption.
What's more, CalAmp's management team is honed in on its long-term margin driver: Subscription services. With the company backing away from automotive vehicle financing and focused on its software-as-a-service (SaaS) solutions that help businesses track their fleets and improve supply chain visibility, CalAmp should see its margins steadily improve after 2020.
As one final note, despite an incredibly challenging fiscal first quarter (ended in May) that saw consolidated sales fall 10%, primarily due to COVID-19, SaaS revenue actually increased 10% to $28 million. This high-margin subscription revenue is CalAmp's long-term key to success.
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