Small-Cap Sorcerers: 3 Stocks Conjuring Up Magical Returns from Humble Beginnings

Stocks to buy

Small-cap stocks with market capitalizations between $300 million and $2 billion offer the potential for substantial growth and outsized returns, albeit with higher risk. These smaller companies can adapt quickly to market changes and capitalize on niche opportunities.

Small-cap stocks have lagged the broader market since last May, trailing by around 13%, but their performance has been roughly on par with the equal-weight S&P 500 index and large-cap tech giants like Apple (NASDAQ:AAPL) over the same period. 

One major upside factor for small-caps is their attractive valuations, trading at a forward price-to-earnings (P/E) ratio of only 14.5x compared to 20.3x for large-caps and a discount to their own historical valuation levels even during times of high interest rates. 

Now could be a good time for investors to weigh up their options and allocate a portion of their portfolio to these companies, so here are three of the best small-cap stocks to consider.

Root Insurance (ROOT)

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Root Insurance (NASDAQ:ROOT) uses data-driven methods to provide auto insurance, focusing on identifying and weeding out bad drivers. ROOT stock price skyrocketed nearly 10% in March, climbing to $68.11 per share before slightly pulling back. This surge pushed the company’s market capitalization close to $1 billion and represented more than a ninefold increase in its share price since reporting strong fourth quarter results in February. 

The company delivered positive operating income for the first time in its history, reaching $5 million, alongside a net loss of $6 million and an adjusted EBITDA of $15 million. Policies-in-force grew by 101% to 401,255, while gross premiums written surged by 146% to $331 million. The company also reported its third consecutive quarter of positive operating cash flow and ended the quarter with $483 million in unencumbered capital.

ROOT could be a great small-cap stock choice for investors to consider thanks to its strong fundamentals.

Planet Labs (PL)

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Planet Labs (NYSE:PL) provides geospatial tools for climate monitoring, agricultural optimization and zone planning through high-resolution imagery analysis. PL has been upgraded to a “buy” rating by some analysts, reflecting a positive trend in its earnings estimates.

PL reported record revenue of $220.7 million for fiscal year 2024, a 15% increase from the previous year. The fourth quarter alone generated $58.9 million, driven by strong demand in the government sector, especially in defense and intelligence. The company surpassed 1,000 customers and secured significant contracts, including a seven-figure agreement with the U.S. Navy. It has seen 15% revenue growth year-over-year (YOY) and it aims for adjusted EBITDA profitability by Q4. Future plans also include further satellite launches and software improvements. 

PL is in great shape moving forward, and it’s one of those small-cap stocks that could deliver great results for investors.

Enovix (ENVX)

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Enovix (NASDAQ:ENVX) develops 3-D silicon lithium-ion batteries for high-capacity applications like smartphones and tech wearables.

ENVX could be an equally strong long and short-term play. Investors with significant funds have shown a bullish interest in ENVX options. Seventeen notable options trades were identified for Enovix, with a split sentiment: 52% bullish and 41% bearish. The trades included five puts totaling $324,575 and 12 calls totaling $641,283. 

ENVX also reported significant positive achievements in the first quarter of 2024. The company recorded strong top-line growth with revenue of $5.3 million, up from $21,000 in the same quarter of 2023. It surpassed its forecast due to strong sales to internet of things (IoT) customers.

Additionally, Enovix took decisive actions to reduce cash burn, targeting a reduction of over one-third of its fixed costs by the end of the year, which will significantly lower capital needs and accelerate the path to profitability. It’s therefore unsurprising that investors are bullish on ENVX. For that reason, I think it’s one of the small-cap stocks to buy right now.

On the date of publication, Matthew Farley did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Matthew started writing coverage of the financial markets during the crypto boom of 2017 and was also a team member of several fintech startups. He then started writing about Australian and U.S. equities for various publications. His work has appeared in MarketBeat, FXStreet, Cryptoslate, Seeking Alpha, and the New Scientist magazine, among others.

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