Before we get on with today’s list of small-cap stocks to buy, I want to remind you about two important points. First, even the experts are uncertain about the economy. The metrics are not bad yet, but the sentiment is horrific. And second is that because of the first point, Wall Street is in a constant state of alert. That’s why the CBOE Volatility Index (VIX) is so far about its average.
Therefore, whatever stocks we consider bargains now can still get cheaper. We must leave room for doubt on purpose so we don’t suffer from a terrible blindside.
Today’s parameters that I set for my small-cap stocks are somewhat loose. Normally I insist on nothing but current solid fundamentals. But it seems that in the last two years things morphed a bit. The sector now contains a bunch of uncertainty. The good companies are suffering doubt in sympathy to stocks like AMC (NYSE:AMC).
So it’s important that investors consider most of these ideas with the proper conviction levels. When the sector is speculative, keep the risk size appropriately low.
Moreover, the iShares Russell 2000 ETF (NYSEARCA:IWM) has been selling off since November. It doesn’t have many fans on Wall Street, and the bulls should respect that.
This week there is additional risk from the Federal Reserve rate hike decision. Consensus had been that Chairman Jerome Powell will raise it 50 basis points, but now experts are fearing a 75-point hike instead. In the end, it’s what he says after the hike that will matter more.
If the indices survive that drubbing, they will face a beast of an expiration day on Friday. Even though they are not always negative, they tend to pack a punch.
All that is to say, however interesting these small-cap stocks to buy are, use an appropriate level of caution as well.
| CRSR | Corsair | $14.11 |
| EAT | Brinker International | $26.30 |
| ELF | e.l.f | $25.88 |
| OSTK | Overstock | $29.92 |
| APPS | Digital Turbine | $15.42 |
| PLAY | Dave and Busters | $35.78 |
| LC | Lending Club | $13.29 |
Corsair (CRSR)
The rally out of the pandemic was astonishing. While it was fun on the way up, it created disruptions that are still causing pain. Expectations went wild and took tech company Corsair (NASDAQ:CRSR) stock with them.
Sadly, it then crashed with the rest of the momentum stocks and lost almost 60% of value from its 52-week highs.
Now it is threatening to retest the lows from early May. The support is not bulletproof, so there is reason for concern, with one slender support line below. These technical facts don’t inspire confidence, but that’s why we also examine the financials for CRSR stock.
Revenues are still growing at a reasonable clip, and it is not bleeding cash. Last year, even though the net income was not impressive, it was still cash-flow positive from operations.
The use of computers exploded during the pandemic. The lockdowns created the need to set up telecommuting offices quickly. This likely pulled demand forward, but eventually this equipment will age. Corsair is likely to benefit from it on the upgrade cycle. Meanwhile, management seems strong enough to survive until then.
Rallies into $17.50 will likely find sellers in the short term. For the bulls to do damage, they would need to overcome the resistance lurking there.
Brinker International (EAT)
Brinker International (NYSE:EAT) stock is back to its levels from two years ago. This means that investors are just as afraid now as they were during the pandemic lockdowns. This is illogical and could open the door for value investors.
EAT stock has not been a star for a while, so we should set realistic expectations.
Support near $23 per share should provide footing as long as the indices don’t crash. The bounce back to the neckline it lost a month ago would be a 20% upside opportunity. If that happens, I would take some off the board and leave the rest as an investment.
Meanwhile, losing the May lows could bring about a sharp drop for a final leg lower.
Smart money would seek to only have a starter order now. Leaving room to add more under duress is one way to mitigate the market risks. The valuation is attractive, as this correction decimated the metrics. EAT is back to having a single-digit price-earnings ratio.
Revenues are still steady and there are no issues with cash flow. The fact that it’s nearly impossible to spot the 2020 effects in the P&L says management is strong.
e.l.f. Beauty (ELF)
e.l.f. Beauty (NYSE:ELF) stock fell out of favor for many years after 2017. It didn’t recover the highs until after last year’s pandemic rally.
Sadly 2022 has not yet been kind to it.
From the highs, ELF stock lost almost 40%, although it has bounced a bit. Now the stock faces short-term resistance above, so there are sellers lurking.
But the opportunity is there for longer-term investors to pick shares up on dips. There should be support near the $20 level in case it goes there. If the bulls are able to rally it above $28 per share, they could reach for the highs again.
The current tests in the equity markets are as tough as they get. The uncertainty and edginess of investors are at extremes. So if ELF stock’s support survives, then the bulls would have a great platform to finally breach the 2017 roof. There is quite a bit of time until the next earnings report. So for the time being, ELF stock will follow the general direction of the market.
Overstock (OSTK)
The hard correction in Bitcoin (BTC-USD) is dragging down stocks that are sensitive to it. Overstock (NASDAQ:OSTK) is one of them, and it’s provided us with an opportunity. The company’s financial metrics suggest that dips are opportunities to buy.
In this case, the technical clues from the chart agree. OSTK stock is falling into support and could see a sharp rebound.
While this opportunity sounds short term, the company is maintaining solid performance metrics. Therefore, it makes sense to bet on it for the long term. Revenues are up over 50% from pre-pandemic trends. It is still profitable for the most part and have humble valuations. With a 9x trailing price-to-earnings ratio and a low price-to-sales ratio, there aren’t any red flags of bloat.
Since it doesn’t trade in a vacuum, OSTK needs the indices to stabilize. But equally as important, it also needs Bitcoin to not collapse. The performance of the stock closely resembles that of the crypto. That is because in the last four years, Overstock has entered the crypto market.
The sector has its haters, but it also has a ton of potential. Consider a long in OSTK stock as an indirect bet on Bitcoin without the risks.
Digital Turbine (APPS)
On paper, Digital Turbine (NASDAQ:APPS) is an outstanding stock to hold for the long term. Its financial metrics are small in absolute values, but immaculate otherwise — big revenue growth, positive and growing earnings and positive free cash flow.
Management has delivered strong growth and with value. For a company like this to have a price-to-sales ratio under 3 is rare. It even posts positive cash from operations.
Yet the stock is falling into an abyss, seemingly shrugging off all the good financial notes. If we zoom out a bit we see that even after a 75% drop year to date, APPS stock is still more than 100% above its breakout level from the pandemic. The rest of the small-cap stocks ETFs have already priced the whole thing out.
That represents potential risk still. But it also explains the discrepancy between bad price action and strong fundamentals. For that reason, I would add it as a long-term bet but definitely not all in. At least not until we see a stabilization on Wall Street.
Dave and Buster’s (PLAY)
The hospitality and leisure sectors suffered greatly at the hands of the pandemic. The lockdowns hurt businesses like Dave and Buster’s (NASDAQ:PLAY). Yet here it is making a valiant comeback.
Incredibly, revenues are now back to pre-pandemic levels. In fact, only in 2019 did they have more sales. Management should earn kudos for this and a bit of benefit of the doubt.
The price action in PLAY stock has not yet reflected this notion. It is still not back to January 2020 levels. Heck it is still struggling to break out from the 2015 levels.
This punishment is not logical, but it also may turn out to be an opportunity. The fact that it can’t sustain a rally is bad, but it also has support, and that’s the trick now.
The $30 zone has held well since 2021, so I can bet on the stock holding there again. If that’s the case, then there could be a 20% rally after the bounce. This will require the markets to also stabilize, so there are two key points to trading this idea. First, is that we heed the clues from the indices. Respect the correction and don’t buy PLAY stock too early.
Second, have a tight stop, because if support fails, it becomes a bearish catalyst. Below $28.80, PLAY could accelerate lower fast before finding footing. There is also a nagging gap on the chart near $20 from fall of 2020.
Lending Club (LC)
I added Lending Club (NYSE:LC) because Upstart (NASDAQ:UPST) was a tad large for a small-cap stocks to buy list. The lending business should stay robust even in tough times. I doubt that the worst-case scenario that experts are discussing plays out. If this many experts are pointing out pitfalls, the industry usually plugs the risks.
Besides, the fundamental metrics for LC stock are still viable. The sales could be better, but it looks like the company is rebuilding them out of the pandemic disruption hole. Meanwhile, it generated more than $200 million in cash from their operations.
Last year it even eked out a positive net income.
The economic experts are scaring the U.S. into hibernation. They’ve almost made turned a decent situation into a self-fulfilling prophecy. There is time to snap out of it, but the Fed must ease up on the rhetoric.
Meanwhile, the analysts who cover LC stock expect higher prices. The current price is less than half of the average price target of $31.21.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.