Let’s talk a bit about growth and potential. The two are not always the same thing, but they both are vital for successful investing. The aim of all stock investments, after all, is to achieve growth – and that means finding stocks with the highest potential.
It’s natural to gravitate toward the headline-grabbing, big-name giants; they’ve got huge market valuations, and have made their early investors very happy. But there’s an unfortunate truism in the markets, based on the iron rules of mathematics, that the larger a company gets, the less likely it is to show big returns. It’s far more likely for a $200 million company to double in value than for a $200 billion giant.
And this brings us to the small-cap stocks. For investors seeking the best combination of high potential for growth and low cost of entry, the small caps may be just the ticket.
We’ve used the Investing Insights platform to find several that fit a profile: a market cap under $400 million and a share price below $10. Even better, these small-cap tickers score a ‘Perfect 10’ smart score. The platform gives every stock a single-digit score, based on a summing up from 6 separate factors. The factors used are known to correlate with future overperformance; when they align together it’s a strong indication for buyers to consider. Let’s take a closer look.
PowerFleet, Inc. (PWFL)
The Internet of Things is transforming a host of industries, from factory floors to warehouses to trucking fleets. PowerFleet (NASDAQ:PWFL), the first small-cap stock we’re looking at, applies IoT and M2M tech to the security, control, tracking, and management of high-end assets, including tractor-trailers, containers, industrial trucks, and cargo, vehicle, and truck fleets.
PowerFleet’s 1Q revenue was consistent with the previous quarter, and included an improvement in earnings. At the top line, the reported revenue of $29 million was only 1.3% off of Q4’s result. The 9-cent EPS loss reported was a 25% improvement from the 12-cent loss reported in the previous quarter. Year-over-year, EPS improved by 40%.
Earlier this month, PowerFleet scored two major new contracts. On May 10, the company announced a 4-year contract with the Israel Police for implantation of a fleet management and driver solution system for more than 7,500 vehicles of 61 different types. The contract includes an option for a 4-year renewal. Two days later, PowerFleet announced a smaller deal with Alabama-based White Oak Transportation, to supply tracking services for the trucking company’s fleet of 850 vehicles, especially its cargo trailers.
Covering PowerFleet for Canaccord, 5-star analyst Michael Walkley sees a clear path ahead for the company’s continued growth.
“With 600K+ subscribers, PowerFleet has the scale and international footprint to compete for global tenders against leading fleet and asset tracking competitors. For fleet management, PowerFleet is one of the only true end-to-end solutions in the market spanning in-cab, refrigerated trailers, dry vans, and containers,” Walkley opined.
The analyst added, “We believe PowerFleet has a strong product portfolio and a leading solutions platform to grow its market share. This strength is demonstrated by its expansive global customer base… We believe PowerFleet has the leadership team in place to execute on its growth strategy and anticipate recovering sales and expanding margins as global economies recover.”
To this end, Walkley rates PWFL a Buy, and his $12 price target implies a one-year upside of 84%.
Overall, the unanimous Strong Buy consensus rating here, based on 4 recent positive reviews, shows that Wall Street agrees with Walkley on this stock. The shares are trading for $6.51, and the average price target of $11.13 indicates a potential upside of 71% for the next 12 months. (See PWFL stock analysis)
AXT, Inc. (AXTI)
AXT (NASDAQ:AXTI) is a material science company that inhabits the supply chain for the semiconductor industry. AXT develops and manufactures the high-performance rare-metal substrate wafers necessary in the construction of semiconductor chips and optoelectronic devices. AXT has operations in both California and China, staying close to Silicon Valley customers and Chinese raw materials.
The company holds a vital niche in the chip industry, and its revenue and earnings have been reflecting that. In the first quarter of 2021, revenue hit $31.4 million, passing the $30 million mark for the first time on 51% year-over-year growth. EPS hit 8 cents, a dramatic turnaround from the 1-cent loss reported in the year-ago quarter.
Along with the Q1 results, AXT also announced its first deliveries of 8-inch diameter gallium arsenide (GaAs) substrates to a major customer. AXT has received ‘significant interest’ from potential customers of GaAs products, and predicts increasing demand as the products finds more applications.
Analyst Richard Shannon, covering this stock for Craig-Hallum, takes especial note of the increasing demand for the company’s products.
“The demand profile from InP (optics, health monitoring) and GaAs (5G, optics, 3DS, microLED) are as powerful as any we can find across small-cap tech. With an improving customer set (tier 1’s driving much of future growth), GM that can still grow and valuation improvement potential from a STAR exchange listing in mid-2022, investors have multiple ways to win in this stock,” Shannon wrote.
Shannon’s bullish comments back up his Buy rating, and his $17 price target suggests a 90% growth potential in the year ahead.
The Wall Street reviews on AXTI break down 3 to 1 in favor of Buys versus Holds, giving the stock its Strong Buy consensus rating. Shares in AXTI are selling for $8.95 each, and the average target of $16 indicates a possible upside of ~79% from that level. (See AXTI stock analysis)
CECO Environmental (CECE)
For the last stock on our list, we’ll shift to the green economy, where CECO Environmental (NASDAQ:CECE) develops, provides, and install air quality and fluid handling systems. In short, the company deals in air pollution control technology, a niche that has been in demand since the 1970s. CECO provides know-how and systems in a wide range of industries, including construction materials like bricks, cement, steel, and glass; and manufacturing, in the automotive, aerospace, pharmaceutical, chemical, and fuel refining sectors.
In the company’s most recent financial release, for 1Q21, the top line came in at $71.9 million, just under the $80.5 million reported in the year-ago quarter, while EPS fell from 10 cents per share one year ago to 3 cents in the current report. In more positive notes, the company reported a year-over-year increase in bookings, from $75.7 million to $92.1 million, and the work backlog of $203.1 million was up 11% from one year ago.
A few days after the earnings release, CECO announced that it had won a large-scale contract with a major semiconductor chip manufacturer. The chip industry regularly works with a variety of rare metals and other pollutant chemicals – and CECO’s new contract covers scrubber and exhaust systems, as well as recirculation pumps — items necessary for the chip maker to meet or exceed environmental regulations.
Turning to the analyst community, H.C. Wainwright analyst Amit Dayal believes the company has a lot going for it and a bright future.
“The company appears to be in recovery from COVID-19 headwinds, with bookings growing to $92.1M during the quarter… The last time bookings were at or above these levels was during mid-2019…. During the next few quarters, we expect to see improved revenues from Engineered Systems as the broader energy markets improve. Management highlighted that the company’s bid proposal environment has been improving, with order pipeline of over $2.0B, which we believe should support continuing order improvement over the next few quarters,” the 5-star analyst explained.
Based on the above, Dayal rates CECE shares a Buy rating, and his $15 price target indicates confidence in a 100% upside for the year ahead.
Once again, we’re looking at a stock with a unanimous Strong Buy consensus rating – this one based on 3 positive Wall Street reviews. The shares are selling for $7.50 and have a $12 average price target, suggesting a 12-month upside of 60%. (See CECE stock analysis)
To find more ideas for stocks trading at attractive valuations, visit Investing Insights.