While the rule of thumb in the market is to invest in stable enterprises in industries with which you’re familiar, sometimes you need to hit the gas with the best small-cap stocks to buy. Let me give you a real-world example.
Suppose you’re a good driver that always obeys the speed limit. However, as you’re merging onto the freeway, you notice that practically every car on the road is gunning it. You can try to slowly merge and subsequently cause a wreck due to the wild speed differentials. Or, you can just gun it. In other words, certain circumstances call for the best small-cap stocks.
Of course, you don’t want to be reckless by just picking up cheap securities merely for their price tag. While the below enterprises may not be the most popular investments, they have underappreciated fundamentals that could drive them higher. And all of them enjoy analyst backing. With that, below are the best small-cap stocks to consider.
Propetro (PUMP)
Based in Midland, Texas, Propetro (NYSE:PUMP) is an oilfield services firm. Specifically, it provides hydraulic fracturing and related services to upstream (exploration and production) oil and natural gas companies. Given the recent lift in the hydrocarbon energy sector, PUMP may be one of the best small-cap stocks based on its relative chart discount. Since the start of the year, PUMP only gained about 5%.
Still, PUMP has been on the move recently. In the trailing five sessions, shares have gained nearly 3% of equity value. Also, looking at its options dynamics via its volatility smile or the implied volatility (IV) plotted at various strike prices, IV rises from 0.73 at the $10 strike price to 2.38 at the $17.50 strike. This indicates that many options traders recognize the forward potential of PUMP’s out-of-money (OTM) calls (PUMP closed at $9.97 recently).
What’s more, analysts peg PUMP as a consensus moderate buy with an average price target of $12. This implies over 20% upside potential.
Caleres (CAL)
An American footwear company, Caleres (NYSE:CAL) owns and operates various footwear brands. As a consumer discretionary idea, CAL may seem risky. Since the start of the year, shares have already gained over 27% of market value. While a strong performance, it’s also possible that Caleres could be due for a correction.
Nevertheless, options traders appear to appreciate CAL’s upside potential. Looking at its volatility smile, IV rises from the low point of the $30 strike price at 0.38 to 0.82 at the $37.50 strike. Therefore, it’s possible that the smart money anticipates robust moves higher from its current closing price of $27.81.
To be fair, the highest IV stands at 1.56 at the S12.50 strike. Possibly, this metric indicates severe risk mitigation. Still, with IV dropping down to 0.63 at the $20 strike, the smart money likely believes that a drop to $12.50 is very unlikely for Caleres. Interestingly, analysts peg CAL as a moderate buy with a $34 price target, implying over 22% growth. Thus, it could be one of the best small-cap stocks to buy.
Couchbase (BASE)
A public software firm, Couchbase (NASDAQ:BASE) develops and provides commercial packages and support for its network clients. Featuring a market capitalization of just under $925 million, Couchbase is a small but promising enterprise. After all, digitalization trends are only increasing, especially with the advent of artificial intelligence. Since the January opener, BASE gained nearly 22% of its equity value.
One attractive component of Couchbase is the gradual rise of its share price. In the past 365 days, BASE gained a bit over 11%. Looking at its volatility smile, IV curiously dips to the lowest point of 0.64 at the $10 strike price. On Wednesday, BASE closed at $16.50.
On the other end of the spectrum, IV rises from 0.82 at $17.50 to 1.41 at the $30 strike. Likely, this backdrop suggests that smart money anticipates relatively little volatility ahead. Instead, they appear to be betting on big upside moves. Right now, analysts peg BASE as a moderate buy with a $21 price target, implying over 27% growth. This is another name to keep in mind for best small-cap stocks.
Titan Machinery (TITN)
Headquartered in West Fargo, North Dakota, Titan Machinery (NASDAQ:TITN) is one of the largest U.S. dealers of agricultural and construction equipment. While it’s a boring play among the best small-cap stocks, it’s also incredibly relevant. As part of the food supply chain, Titan is a key cog in national infrastructure. However, TITN has struggled this year, with shares losing nearly 27% since the January opener.
Unsurprisingly in my view, however, the smart money appears ready to pounce on the discounted opportunity. For the midweek session, TITN closed at $29.01. Interestingly, its volatility smile shows that IV of 0.47 at the $35 strike price rises consistently to 2.18 at the $70 strike. On the other end, IV only increased to 0.81 at the $17.50 strike.
Therefore, it’s possible that traders see a relatively low risk of significant downside moving forward. Instead, it might be clear skies ahead (although it’s a risky proposition to be sure). Still, analysts appreciate TITN, pegging it a consensus strong buy with a $40.75 price target. This implies growth of over 40%.
Excelerate Energy (EE)
An energy transportation company that mostly focuses on floating liquefied natural gas (LNG) solutions, Excelerate Energy (NYSE:EE) covers multiple avenues of the LNG supply chain. With geopolitical tensions and flashpoints contributing to a decline in hydrocarbon supplies, Excelerate should become relevant over the next several months. However, the market doesn’t seem to think so, sending EE lower by nearly 25% since the January opener.
Of course, the opportunistic smart money may be sensing a buy-in prospect here. Per its volatility smile, IV of 0.36 at the $20 strike increased to 2.42 at the $31 strike. On Wednesday, EE closed at $18.55 in the open market. This dynamic suggests that options traders believe in the long-term bullish case for Excelerate (and perhaps the underlying LNG industry).
Still, speculators need to be careful because an IV of 0.35 at the $17 strike eventually jumps to 2.25 at the $10 strike. Therefore, traders recognize the risk of extreme volatility, which isn’t surprising. Notably, though, analysts peg EE as a moderate buy with an average price target of $28.50. This forecast implies nearly 54% upside potential.
Olema (OLMA)
Headquartered in San Francisco, California, Olema (NASDAQ:OLMA) is a biotechnology firm focused on developing treatments for endocrine-driven cancers. Specifically, it aims to provide solutions for women suffering from the disease. Two of its therapeutics addressing metastatic breast cancer are in Phase II clinical trials, possibly boding well for OLMA long term. Additionally, investors love Olema, with shares skyrocketing almost 347% since the January opener.
To be sure, betting on such a fast-rising security presents extraordinary risks. Still, OLMA may still qualify as one of the best small-cap stocks. According to Strategic Market Research, the global metastatic breast cancer treatment market reached a valuation of $17.13 billion in 2021. Further, the sector should expand at a compound annual growth rate (CAGR) of 10.4% to hit $41.74 billion by 2030.
Right now, Olema carries an equity value of almost $488 million. Theoretically, then, it benefits from a wide total addressable market. Even with the massive swing this year, analysts peg OLMA as a unanimous strong buy. Their average price target clocks in at $21, implying over 78% upside potential.
1-800-Flowers (FLWS)
Moving to the other end of the sentiment spectrum, 1-800-Flowers (NASDAQ:FLWS) is a relevant enterprise, especially around Valentine’s Day. It’s also a go-to solution for bickering couples. However, Wall Street has difficulty recognizing the viability of FLWS. Since the start of the year, shares dropped nearly 34% in equity value. Over the past five years, they’re down more than 48%.
Ordinarily, such losses call for an exit strategy. However, for the intrepid contrarian, FLWS could rank among the best small-cap stocks to buy. In full disclosure, the narrative involves the concept of circumstances not getting much worse from here. The difference is that smart money appears to be forwarding this thesis.
Looking at FLWS’ volatility smile, IV rises from a low of 0.40 at the $6 strike price to a whopping 5.42 at the $20 strike. Keep in mind that FLWS closed at $6.34 recently. Still, traders are hedging for extreme downside risk, with IV popping to 4.17 at $2. For those who are torn on making a decision, analysts peg FLWS as a moderate buy. Their price target stands at $18, implying nearly 184% upside potential.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.