Analysts love these small-cap stocks.
After a volatile and unpredictable 2020, the U.S. economy appears ready for a significant rebound in 2021. During the early stages of economic growth cycles, many investors are once again willing to take risks on small-cap stocks. In the past six months, the small-cap Russell 2000 is up 48%, outpacing the large-cap S&P 500, which is up 28% in that time. For investors willing to stomach the risk and volatility of small-cap stock investing, here are nine of the best small-cap stocks to buy as recommended by analysts.
Aurora Cannabis (ticker: ACB)
Shares of Canadian cannabis producer Aurora Cannabis dropped as low as 60 cents per share in March 2020, forcing the company to implement a 1-for-12 reverse stock split to maintain its U.S. listing. Aurora’s cash burn and dilution remain valid concerns, but the stock has more than doubled since Election Day in November on optimism surrounding U.S. cannabis legalization efforts. Morningstar analyst Kristoffer Inton says Aurora has made progress on cost cutting, but near-term upside may be limited following the stock’s post-election run. Morningstar has a “neutral” rating and a $24 fair value estimate for ACB stock.
Sonic Automotive (SAH)
Sonic Automotive is one of the largest U.S. auto retailers, but its market cap is only about $2 billion. Bank of America analyst John Murphy says Sonic’s EchoPark standalone used vehicle sales unit has been a growing profit contributor for Sonic in recent quarters. EchoPark revenue was up 25% in the fourth quarter of 2020. Murphy says Sonic demonstrated strong cost controls in a difficult environment in 2020, setting the company up well to capitalize on a rebound in auto demand in 2021. Bank of America has a “buy” rating and a $67 price target for SAH stock.
Core Laboratories (CLB)
Core Laboratories provides enhanced oil recovery techniques for the oil and gas industry. The Energy Select Sector SPDR Fund (XLE) has more than doubled the S&P 500’s gains so far in 2021 as investors anticipate a global boom in oil demand. Morningstar analyst Preston Caldwell says Core is one of the highest-quality oil services companies. Caldwell says the company’s core analysis business faces virtually no challengers, and its return on capital over the past two decades is unrivaled, which is a testament to its skilled management team. Morningstar has a “buy” rating and a $44 fair value estimate for CLB stock.
BioCryst Pharmaceuticals (BCRX)
BioCryst Pharmaceuticals is a biotechnology company that has two approved products: Rapivab for treating flu and Orladeyo for treating hereditary angioedema. Bank of America analyst Tazeen Ahmad says BioCryst has also reported “highly encouraging” data for BCX9930 in treating paroxysmal nocturnal hemoglobinuria. Orladeyo was approved by the Food and Drug Administration in December 2020, and Ahmad estimates the drug had $1.8 million in sales in the first quarter alone. She says investors should watch for feedback related to the Orladeyo launch on the company’s upcoming earnings call. Bank of America has a “buy” rating and a $13 price target for BCRX stock.
Frank’s International (FI)
Frank’s International provides tubular services to the oil and gas industry. In March, the company announced a merger with private U.K. oil services company Expro. The merger will give Frank’s shareholders a 35% ownership stake in the combined company. Caldwell says Franks will “benefit greatly” from a recovery in the global deep-water drilling business in the next several years. If not for the merger announcement, Caldwell says he would have increased his fair value estimate for Frank’s on a standalone basis following its fourth-quarter earnings beat. Morningstar has a “buy” rating and a $5 fair value estimate for FI stock.
Vizio Holding Corp. (VZIO)
Vizio sells smart TVs and operates a smart TV platform that includes its SmartCast operating system and Inscape automatic content recognition technology. Vizio completed its initial public offering in late March, pricing its IPO shares at $17.50. Since then, the stock has rallied to nearly $26, but Bank of America analyst Wamsi Mohan says the rally may just be getting started. Mohan says Vizio is well positioned to capitalize on a secular shift in TV viewership and ad dollars to over-the-top streaming models. Bank of America has a “buy” rating and a $33 price target for VZIO stock.
Tenneco produces clean air, powertrain and ride performance systems and products. Morningstar analyst Richard Hilgert says Tenneco shares trade at a steep discount to his fair value estimate in part because of the company’s high debt load and exposure to internal combustion engine vehicles. However, Hilgert says Tenneco has made significant strides in reducing debt and improving operating performance. He says Tenneco’s DRiV wheel-end products allow for “development of complete corner modules,” which are critical for sensors, electric suspension and other autonomous vehicle components. Morningstar has a “buy” rating and a $29 fair value estimate for TEN stock.
PROS Holdings (PRO)
PROS specializes in pricing optimization software. Bank of America analyst Victor Cheng says PROS has long-term opportunities in both online travel sales and business-to-business sales. Cheng says PROS is an excellent economic rebound investment and should return to greater than 20% revenue growth. PROS is a market leader in revenue management solutions and New Distribution Capability-enabled airline retail, which Cheng says will become increasingly necessary for airlines in the digital age. He says PROS has best-in-class artificial intelligence-driven capabilities in the B2B industry. Bank of America has a “buy” rating and a $56 price target for PRO stock.
Weatherford International (WFTLF)
Weatherford provides equipment and services to the oil and gas industry. Caldwell says Weatherford emerged from bankruptcy nearly debt-free after years of mismanagement. Unfortunately, the health crisis crushed the oil industry in 2020 just as Weatherford was getting back on its feet. Caldwell says investors seem to be writing off Weatherford given its difficult past, but he sees a company that could eventually be “relatively profitable.” He projects 16% earnings before interest, taxes, depreciation and amortization margins by 2025. Morningstar has a “buy” rating and a $28 fair value estimate for WFTLF stock.
Nine best small-cap stocks to buy in 2021:
— Aurora Cannabis (ACB)
— Sonic Automotive (SAH)
— Core Laboratories (CLB)
— BioCryst Pharmaceuticals (BCRX)
— Frank’s International (FI)
— Vizio Holding Corp. (VZIO)
— Tenneco (TEN)
— PROS Holdings (PRO)
— Weatherford International (WFTLF)
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Update 04/28/21: This story was published at an earlier date and has been updated with new information.