10 Small-Cap Stocks With Large-Cap Potential

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Small-cap stocks. They fly under the radars of most investors, who struggle to look past behemoths like Apple Inc. (NASDAQ:AAPL) and familiar names like Facebook, Inc. (NASDAQ:FB). Small-cap stocks that are well worth owning are out there though. They’re just usually overlooked because they can’t get enough people’s attention.

Investors willing to look under a few unturned rocks, however, can sometimes find buried treasure.

To that end, here’s a run-down of the top 10 small-cap stocks to consider right now as the broad market continues to toy with a more serious breakdown. Not only are some of these names high-potential possibilities in their own right, quite often smaller names trade out of sync with the overall market and may well offer a refuge should things get ugly for the market’s bigger players. In some cases, the underlying chart is just as compelling as the fundamental argument is.

In no particular order, here are the top 10 small-cap stocks with large-cap potential:

Small-Cap Stocks With Large-Cap Potential: Sunrun (RUN)

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While the broad solar-power movement may be bumping into headwinds — ranging from subsidies to cheap natural gas to consumer hesitance — not every name is getting caught up in the industry’s entanglements. Sunrun Inc (NASDAQ:RUN), which not only installs solar panelsbut will also facilitate the financing of them, continues to make forward progress.

Quantifying this growth is this year’s expected revenue growth of 26%, which should be enough to crank per-share profits up from last year’s 86 cents to $1.16 this time around. More of the same is in the cards next year as well.

RUN stock is on a tear too, up 71% for the past twelve months, and knocking on the door of a new multi-year high.

Small-Cap Stocks With Large-Cap Potential: CubeSmart (CUBE)

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Not all small-cap stocks to buy have to be ‘stocks’ in the traditional sense. They can be REITs too, and offer the same kind of upside.

Enter CubeSmart (NYSE:CUBE) — a real estate investment trust that specializes in self-storage facilities. Americans are keeping as much of their junk as ever — if not more — and CubeSmart is more than happy to capitalize on consumers’ unwillingness to let things go. The clincher: A dividend yield of 4.1% is above the market average. And this company has a history of strong and steady increases in its payout.

Yes, the prospect of more rate hikes looms above and that could put downward pressure on CUBE shares. There may be more bark than bite to that possibility though, and most of the downside is already baked into the REIT’s price.

Small-Cap Stocks With Large-Cap Potential: G-III Apparel (GIII)

It would be easy to dismiss G-III Apparel Group, Ltd. (NASDAQ:GIII) as just another eventual casualty of the so-called retail apocalypse. But doing so oversimplifies G-III Apparel’s position in this marketplace .

You know the company, even if you don’t think you know the company. G-III is one of the names that makes clothing which eventually carry labels from Calvin Klein, DKNY, Levi’s, Starter, Guess and more. It operates on the less volatile side of the business, supplying clothing for brands that take the bulk of the risk.

One only has to look at GIII’s Q4 report, which boasted a nearly 18% improvement in year-over-year sales at a time when most retailers are thrilled just to match their year-over-year comps.

Small-Cap Stocks With Large-Cap Potential: Simply Good Foods (SMPL)

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If you’ve not heard of Simply Good Foods Co (NASDAQ:SMPL), there’s a good reason — the company didn’t exist until June of last year, when it was formed to capitalize on a branch of Atkins Nutritionals (Editor’s Note: Source is behind a paywall).

Despite a sub-$1 billion market cap that keeps it off a lot of investors’ radars, Simply Good Foods has attracted the attention of several high-profile players. All four of the research outfits that have initiated coverage of the company have called it a “Buy,” and Goldman Sachs Asset Management owns a little more than 7% of the company.

Moreover, the pros collectively say SMPL is worth $16.20, up 27% from its current value.

Small-Cap Stocks With Large-Cap Potential: R1 RCM (RCM)

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Not only is R1 RCM Inc (NASDAQ:RCM) another one of those small-cap stocks that not many investors have  heard of, but the name doesn’t really inspire investors to dig much deeper. Nevertheless, R1 RCM is one of a handful of small-cap stocks to buy sooner than later.

R1 RCM helps healthcare facilities manage their revenue cycle. In other words, the company offers a platform that helps hospitals reduce waste, eliminate mistakes and collect patient fees faster and more effectively.

Baird analyst Matthew Gillmor noted in his recent upgrade of RCM stock: “our prior survey work suggests hospitals are increasingly receptive to outsourcing, especially for RCM,” adding “Additionally, the run-rate exiting 2020 should be even higher (perhaps >$250M), as margins will still be ramping and R1 should benefit from automation initiatives.”

Small-Cap Stocks With Large-Cap Potential: Sally Beauty Holdings (SBH)

Calling a spade a spade, it will take some guts to step into Sally Beauty Holdings, Inc.(NYSE:SBH) here and now. The stock is down 10% for the past twelve months, never catching the wave that pushed most other stocks higher for the better part of 2017.

Of course, with stagnant revenue and a net income that’s slowly-but-surely shrinking, who can blame the doubters?

The company finally seems to have had a much-needed wake-up call though. A month ago it unveiled credible plans to do some serious cost-cutting that will ultimately fund long-term growth. The ‘growth’ plans themselves are still scant, but it’s a start. Any progress from a company with a stock that’s only trading at 7.0 times its forecasted earnings has a lot of potential.

Small-Cap Stocks With Large-Cap Potential: Diebold Nixdorf (DBD)

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It’s another unfortunately-named organization. And, there’s no sales growth to speak of, and earnings growth is minimal. So why bother looking at Diebold Nixdorf Inc (NYSE:DBD)? Because a new CEO could be just the tweak this ATM and POS technology provider needs become a great company.

That’s what activist investor Alexander Roepers says anyway. He’s thrilled about Gerrard Schmid, who took the helm in February. “The newly combined company is now set up for success,” Roepers explained, adding that he felt DBD might even double in value within the next 18 months.

The analyst community sees better days too, even if they’re not as optimistic as Roepers is. They’re calling for earnings of $1.56 per share next year, up from this year’s outlook of $1.16.

Small-Cap Stocks With Large-Cap Potential: Quidel (QDEL)

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Quidel Corporation (NASDAQ:QDEL) makes a variety of medical diagnostic equipment. Nothing earth-shattering, but all of it marketable.

Don’t let the boring product line fool you though. It won approval for a couple of key products in the last year, and the acquisition of Triage late last year led to a 118% increase in Q4 revenuethat gave the company the scale it needed to clear significant profits.

It’s all enough for Raymond James analyst Nicholas Jansen to tout the stock, upgrading it to a “Strong Buy” and upping his price target to $69. Jansen feels the market underestimates the growth opportunities that will arise as its platforms add to their functionality and cross-selling begins in earnest.

Small-Cap Stocks With Large-Cap Potential: Rayonier Advanced Materials (RYAM)

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In case you’re wondering, yes, Rayonier Advanced Materials Inc (NYSE:RYAM) is an offshoot from Rayonier Inc. (NYSE:RYN). The 2014 spinoff was meant to give the company’s cellulose division its best shot at realizing its full value, and not get in the way of everything else forestry player Rayonier was doing.

Yep, it’s boring. Cellulose and pulp, used to make paper, is anything but cutting edge. There’s a lot to be said for boring products though, and for Rayonier Advanced Materials in particular.

Hedge fund manager Mick McGuire, of Marcato Capital Management, sees the full potential, but adds that to unlock it the “company should concentrate on integrating its recent acquisition, paying down debt and buying back stock.” If it can do that, he feels RYAM shares could be worth as much as $60 within three years. That’s almost three times as much as its current price.

Small-Cap Stocks With Large-Cap Potential: TiVo Corp (TIVO)

Last but not least, add TiVo Corp (NASDAQ:TIVO) to your list of small-cap stocks to buy for their unexpected growth.

Yes, this is the same TiVo that makes set-top television tuners/boxes used by cable television subscribers. It seems like a bit of an uphill battle, with the cord-cutting movement in full swing, and with streaming boxes like the Apple TV or Roku being the go-to alternative platform that makes cord-cutting possible.

Take a closer look at what’s going on with the cord-cutting movement though. Many consumers are hesitant to give up their cable boxes because in so doing, they also give up their video-recording capabilities and their access to sports and special broadcast events.

TiVo’s solution is a set-top box that allows for the recording of antenna-delivered broadcasts. As more and more consumers realize TiVo can deliver the best of all worlds without an actual cable subscription, it’s positioned to be one of the centerpieces of the cord-cutting movement.

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Ignore This Advice and Risk Losing 50% of Your Nest Egg

With the jaw-dropping stock-market dives we’ve seen in the last 3 months, you can be forgiven if your stomach tightens just a bit when you go to check your retirement account.

So today I’m going to give you my 3 best tips for securing your hard-earned cash—and even better, locking in a dividend stream you can easily live off of in retirement.

And no, you won’t need a seven-figure nest egg to pull off what I’m going to show you now.

Step #1: Diversify the Right Way

You no doubt know that diversification is key to protecting your wealth, but if you only go halfway, it will end in disaster. By that I mean doing what many folks do: throw their money in a low-cost index fund, like the Vanguard 500 Index Fund (VOO), and leave it at that.

But these people have forgotten their history. Like the last time the S&P 500 did this—just 10 short years ago:

50% of Your Nest Egg—Gone in a Year!

So how do we save our hard-earned cash from the next swoon?

One easy way is to buy US Treasuries to offset any hits you might take in the stock market, since Treasuries tend to go up when stocks go down (and vice versa):

The Treasury Cushion

But since Treasuries don’t go up as much as stocks go down in bear markets, this isn’t going to cut it. We need to dig deeper.

There are many other investments that go their own way—which isn’t necessarily in the same direction as stocks.

For example, municipal bonds tend to rise when people are more risk-averse, while tech stocks fall. So you want to make sure you have a bit of both so you can profit from one when the other goes down and avoid suffering losses that will take years, or decades, to recover from.

This is the most important tool the ultra-rich use to protect their nest eggs. The stories you hear of multimillionaires losing everything? It’s almost always a result of failing to diversify. Take Masayoshi Son, a billionaire who lost around $70 billion (yes, with a “b”) during the dot-com crash of 2000. Why? Because all of his money was in stocks.

Step #2: Add Some Funds to Your Stocks

You want to diversify beyond just asset classes, though. To get broad exposure within each asset class, add some funds to your stock holdings.

To explain why this is important, let’s take a look at Alphabet (GOOG) and the PowerShares QQQ ETF (QQQ), which tracks the tech-focused Nasdaq 100 index. If you bet only on GOOG in 2018, you’d be down a bit on your investment. But the index? It’s up 4.2%:

The Consequences of Going All in on One Stock

Of course, you could point to Amazon (AMZN) as the better pick—it’s up 34.2% in 2018. But if you’d chosen AMZN over QQQ or GOOG in early 2016, you would’ve made the worst choice of all:

Now Who’s the Biggest Loser?

The takeaway? Buying a fund lowers your risk of buying a good stock at a bad time.

Because even if you’re right to bet on either of these companies—which have both soared over the long term—buying at the wrong time, when their rises have been overextended, would have crimped your returns.

With a fund, you get access to a lot of high-quality companies in one buy. And while you may get some at a bit of a high price, you’ll also get some cheap. So buying a fund that’s diversified across stocks lowers your risk of overpaying for just one stock, limiting your downside in the short term—a crucial move if you’re a retiree who needs to tap your portfolio for cash.

Step #3: Lock in Big Cash Dividends

The final key to protecting your nest egg is also the most often overlooked: securing an income stream.

Because if you can invest your nest egg in assets that produce income higher than your annual costs, provided that income stream never declines below your expenses, you can largely ignore market swings.

Most people ignore this because yields are lousy right now. Even with the 10-year Treasury reaching 3%, you’re still getting a measly $2,500 per month on a million bucks. That’s less than $15 per hour, less than minimum wage in a growing number of US cities.

With the S&P 500, you’re getting less—$1,525 per month in income on a million bucks. Madness!

People try to subsidize these paltry income streams by harvesting capital gains from their stock holdings—but that’s much easier said than done. Structuring payouts in a way that won’t destroy your portfolio is almost impossible—especially if you end up retiring a year or two before a recession.

To demonstrate this, look at what happens to a $1.2-million nest egg put in the S&P 500 just before the 2008–09 meltdown; while it grows a bit before the end of 2008, things go downhill fast:

Index Fund Clobbered by a Bear

As if that weren’t bad enough, it’s doubly devastating for retirees who need income from their investments. Look at what happens to a retiree during the same period who tries to live off of $45,000 in passive income on that $1.2-million nest egg:

Even with a conservative 3.8% withdrawal rate, the retiree’s nest egg takes several years to recover from the 2009 loss—and although the S&P 500 recovers by 2013, the retiree’s portfolio is still down 18.9% from where it was 5 years earlier.

Why? Because of a lack of a solid income stream.

To protect from this, you need to not only on diversify away from just stocks but also toward funds that get you a variety of holdings and safe dividend income.

Revealed: This “Indestructible” 10.0% Dividend Is a Must-Buy

My favorite funds for all investors—retirees and twentysomethings alike—are a special kind of investment called a closed-end fund (CEF).

If you’re not familiar with CEFs, here’s the upshot: they can (and regularly do) deliver fast 20%+ gains and massive 8%+ dividends in one single buyThey are, hands down, the closest thing to the perfect investment I’ve ever seen.

I recently released my 5 very best CEFs to buy for 2018, and I’ll reveal the complete list when you click here.

When you do, I want you to pay particular attention to fund No. 3 on my list.

It’s a totally ignored CEF paying a rock-solid 10.0% CASH dividend now. It’s run by a Warren Buffett disciple who uses the master’s battle-tested strategies to deliver outsized gains when the market is soaring—and slash your volatility when stocks fall out of bed.

And it works like a charm!

That’s why I’ve made this fund—which has been around since 1986—a core recommendation of my “safety first” CEF Insider service. Check out how it’s outperformed the market since then, with a LOT less volatility:

A Smooth Ride Higher

Imagine holding a fund like that, which rides higher like it’s on rails! Also remember that almost all of this return was in CASH, thanks to pick No. 3’s monstrous 10.0% dividend, offering even more protection from the market’s ups and downs.

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Source: Contrarian Outlook