This year has tested the resolve of investors like a few years ago. In the first six months of 2022, the benchmark S&P500 recorded its worst performance since 1970, while the Nasdaq Compound shouted in bearish territory.
Yet despite this turmoil, my belief that some small-cap stocks can significantly outperform over the long term remains unchanged. A “small cap stock” is traditionally defined as a publicly traded company with a market capitalization between $300 million and $2 billion.
Although small-cap companies often carry additional risks during periods of volatility (for example, they may not be profitable and/or time-tested), they can offer exceptional potential for growth and innovation. It only takes one or two big wins in the small cap space to generate life-changing money in the long run.
As of the August 25, 2022 close, four of my top eight weighted percentage holdings were small-cap stocks. With these four stocks collectively representing more than 18% of my invested assets, there is no doubt that I am betting the farm on the outperformance of certain small caps.
The first relatively small stock I made a big long-term bet on was a cloud-based programmatic ad tech company. PubMatic (PUBM -3.50%). Of the 43 stocks I have positions in, PubMatic ranks 8th among invested assets.
PubMatic is a sell-side programmatic ad provider (SSP). In plain English, this means that it helps publishers sell their digital signage space to advertisers using automated software. Due to industry consolidation, there aren’t too many SSPs for publishers to choose from.
If there’s one obvious reason to buy PubMatic, it’s because advertising dollars are continually shifting from print and traditional cable to digital formats, such as video, mobile and over-the-top streaming channels. . While the digital advertising industry is expected to grow at an average annual rate of around 10% through the middle of the decade, PubMatic’s annual organic growth rate has consistently hovered between 20% and 50% for the past two years. This reflects both the limited choice in the SSP space, as well as the company’s programmatic advertising platform that satisfies advertisers and publishers with relevant ad placement.
Additionally, PubMatic has designed and built its own cloud infrastructure to run its programmatic advertising platform. While this is a time-consuming and expensive undertaking, it should result in significantly higher margins than other SSPs that rely on third-party infrastructure.
With $183 million in cash, cash equivalents and marketable securities, and zero debt, PubMatic appears to be in excellent shape to sustain double-digit growth throughout the decade, if not well beyond.
The second small-cap stock I’m betting on on the farm is a dog-focused products and services company Bark (BARK -4.42%). Bark is my third largest holding and represents over 6% of my invested assets.
As a pet owner for virtually my entire life, I can attest that wallets open wide when it comes to the health and well-being of your furry family member, at gills, feathers or scales. According to data from the American Pet Products Association, it has been more than a quarter century since spending on pets in the United States has declined year over year. In short, even the worst recession in decades hasn’t slowed pet spending.
What makes Bark so appealing is the company’s operating model. Although Bark’s products can be found in tens of thousands of outlets across the country, the real lure is its online subscription service. By the end of June, Bark had nearly 2.28 million active subscribers and generated about 90% of its sales in its direct-to-consumer segment. This is important because it is much cheaper for a business to manage its inventory if most of its revenue comes from predictable subscriptions. Unsurprisingly, Bark’s gross margin has mostly hovered around 60%.
Bark’s innovation is also a key growth driver. During the pandemic, the company introduced Bark Home for common accessories (e.g. beds, leashes, and collars), Bark Bright for canine dental needs, and Bark Eats, which will target dry food diets for dog breeds. specific. These new additions are fueling incremental sales and should be key in pushing Bark to recurring profitability over the next two years.
The third small-cap stock I’ve stacked in over the past two years is a furniture company. Lovebag (TO LIKE -5.59%)which represents over 3% of my invested assets and is my seventh largest holding.
Just saying the words “furniture stock” is often enough to put most investors to sleep. This is because the furniture industry is based on a heavy brick-and-mortar model that relies heavily on foot traffic and the same small group of wholesale furniture suppliers. Lovesac throws most of that traditional approach out the window – and it works.
One of the biggest differences between Lovesac and all other furniture suppliers is…its furniture. Although it was initially known for its pouf-style chairs called “bags”, around 88% of the company’s net sales now come from sactionals, i.e. modular sofas that can be rearranged from dozens ways to fit most living spaces. Sactionals have over 200 different cover choices, can be fitted with a number of upgrades, such as premium surround sound and wireless charging stations, and the yarn used in their covers is fully manufactured from recycled plastic water bottles. Its ecological and functional furniture all in one.
The other significant change from traditional furniture retailers is Lovesac’s reliance on its omnichannel sales platform. For example, the company moved almost half of its sales online during the height of the pandemic. It has also forged numerous in-store partnerships and operates pop-up showrooms to familiarize the public with its products. This omnichannel approach reduced its overhead and propelled Lovesac into years of recurring profitability before Wall Street forecasts.
Majestic First Silver
The fourth and final small cap stock I bet the farm on is a silver miner Majestic First Silver (AG -5.00%). I became the owner of First Majestic following its acquisition of Primero Mining in May 2018. It currently represents almost 6% of my invested assets and is behind Bark as my fourth largest holding.
In my view, there are macro and company-specific reasons to be optimistic about the future of silver and one of the largest silver producers in the world, First Majestic.
At the macro level, all signs point to a steadily increasing demand for silver throughout the decade. Although recessions can reduce silver demand for very short periods, the shiny metal is a key component used in solar panels and multiple components for next-generation vehicles. Indeed, the push for green energy is expected to create a sustained boom for the silver mining industry.
To add to this point, the gold/silver ratio is at 91, which is well above its historical average of closer to 60. This would imply that silver is more likely to outperform gold in the years to come.
On a company-specific basis, First Majestic Silver is poised to benefit from sustained gold and silver equivalent production at the low-cost San Dimas mine, as well as a number of projects to reduce ongoing operating expenses at the company’s four operating mines. in Mexico. Between the ramp-up of the recently acquired Jerritt Canyon gold mine and expected new production from San Dimas, First Majestic appears to be on track to generate nearly double the silver equivalent production this year as in 2017. .