3 small cap stocks to buy that are facing extreme stress
Wall Street investors have recently lost confidence. This makes it harder to be confident when finding stocks to buy.
Perhaps the jitters started with the start of the unwinding of the quantitative easing (QE) program. The Federal Reserve has officially announced that the efforts will end next March. Fed Chairman Jerome Powell also suggested starting the quantitative tightening (QT) process as well. Therefore, we should expect them to raise rates as early as March as well.
Nonetheless, today we’re going all out to find three that have big potential rebounds. The caveat is that they belong to a group that has lost all love on Wall Street. Small caps lost their mojo and led the indices lower. From their highs, they have more than ended a recession by Wall Street’s definition.
The problem really started with the size of the gathering outside of the pandemic. Investors have outbid them irrationally and unfortunately the pendulum has to swing the other way before it stabilizes. In the meantime, we have to endure extremes on both sides. Among the group of losers, there are gems that fall for no internal reason. For example, Palantize (NYSE:PLTR) has a great company and still can’t find support.
It’s like all of Wall Street is now trading like a Reddit monkey. At some point homework and fundamentals will matter. This foolishness will come to an end, but for now adopt a cautious defensive attitude. To adapt, I accepted the fact that I cannot trust logic. Therefore, I would not make emphatic investments in full size. We should by design inject a lot of doubt into our bullish assumptions.
The positive reaction to Apples (NASDAQ:AAPL) gains are a sign of returning sanity. In contrast, the 9% rally after robinhood (NASDAQ:HOOD) terrible title says to stay alert. Let’s just resolve to expect the unexpected.
The three stocks to buy today have strong fundamentals and they fall into support. I eliminate as many question marks as possible, so as not to invest in proverbial bullshit. Catching falling knives is hard enough, so we should avoid stocks with questionable fundamentals. The three small cap stocks to buy this week are:
- Beyond meat (NASDAQ:BYND)
- Etsy (NASDAQ:ETSY)
- Phase (NASDAQ:ENPH)
Stocks to Buy: Beyond Meat (BYND)
Although I’m not a fan of the Beyond Meat food item, BYND’s stock looks delicious. Under normal circumstances, a similar chart would make me place a large upside bet. But I have to consider the fact that now the bears control Wall Street.
My guess is that investors will regain confidence in the coming weeks. Therefore, owning BYND shares now for a stimulus rally makes sense. However, I have to leave room for error one way or another. One way is to use options. There, I can limit my personal expenses and maximize my return. Another way would be to only take partial positions leaving room to add more later.
The alternative meat market has plenty of room to grow. Competition is building, but there is enough for all to thrive. Beyond Meat is a frontrunner, so it should maintain an edge there unless management fumbles completely. There is no evidence of any major hiccups in their finances.
Revenues are growing at a rapid and steady rate. Even if they are still losing money, it is acceptable at this point in their cycle. There is no evidence of inflated value because its price to sales (P/S) ratio is below 10. Investors are now much more realistic than in previous periods. Moreover, their operating cash flow is positive, which means that they do not have to hemorrhage to exist.
Profit margins are improving so there are no flags to raise. Management simply needs to focus investors’ attention on what matters for the future. They have done a good job during the pandemic by turning to consumer segments. They need to do more in the coming months. Investor confidence will return in this one, and the rally could be substantial. If that happens, there will be plenty of resistance areas along the way. But the first thing is to stop the trend lower by not falling below $50 per share.
During the pandemic, Etsy was a great place for people stuck at home. When the world went into house arrest, it needed cyber outlets. ETSY provided one for temporary income and for fun. During the explosion of unemployment in 2020, the platform provided a potential new source of income for entrepreneurs. Just for this service, he earned the right to be on the list of stocks to buy for a while.
Etsy occupies a unique position between social media platform and online retail. I doubt it has a problem staying relevant for the future. Management seems well versed in its ways if we were to judge by its financial metrics. Last year, revenues increased by 29%, and the year before, by 111%. The longer term trend is equally impressive, so they know what they are doing. Etsy now generates $1.6 billion in gross profit and half a billion in net revenue.
Statistically, the stock is not expensive with a price/earnings ratio (P/E) of 40 and a P/S of 9. Although it continues to grow as quickly, investors should not be so picky with profitability measures. The P/E seems high, but not so much that they swell. This correction in ETSY stock looks like a good opportunity to commit long into the future.
It will take stock markets in general to stabilize, but I bet a nice recovery is in the works. Management now generates $680 million in cash from its own operations. It’s a strong position to pursue the strategies they need. There are no apparent setbacks in the way, except for investor sentiment.
Stock to buy: Enphase (ENPH)
Over the past few years, the world has finally committed to a few pie-in-the-sky concepts. One of them is to “go green” with ESG investing. Now, all major countries have rolled out rules and regulations that force the issue. Two major aspects of this are solar energy and the abolition of the fossil fuel vehicle.
Both of these trends play well into Enphase’s business. They have excellent technologies serving the solar energy industry. Their smart panels give the technical edge and they already have a forerunner advantage. The competition is tough, but so far they are looking for it.
The best way to judge a company is to look at its scorecard. Enphase’s financials are strong and show steady sales growth. Last year’s revenue was double that of 2019. Gross profit was almost double 2018’s sales. Clearly, the team is performing well enough to earn some benefit of the doubt.
The P/E is a bit high but that’s fine for this growth phase of the game. The P/S is still reasonable at 13.7, not to mention that they now have a net income of $165 million. After a 60% correction in two months, I bet there will be buyers lurking in the support. These levels have been crucial since October 2020.
At the date of publication, Nicolas Chahine had no position (directly or indirectly) in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to InvestorPlace.com publishing guidelines.
Nicolas Chahine is the Managing Director of SellSpreads.com.