Small-cap stocks generally refer to those stocks that have a market valuation of less than a billion dollars. But the definition is a bit fluid because some consider market capitalizations of under $2 billion to be small capitalizations. It’s essentially a way of classifying stocks based on their size.

Because small-cap stocks differ in their growth potential and risk profile, they are a different kind of security. They tend to be newer companies that are still working out their business models, products or strategies. At this stage of a company’s life, it’s very likely that it’s making little to no money or re-investing whatever little it makes into more research. If the product research is more complex, the company could have no income at all and be dependent on investors to fund the research.

Once public, its valuation would be totally dependent on its expected growth potential. If the company is in the commercialization stage, or has started generating revenue, there’s still no guarantee that customers will like the offering. And if, for any reason, the effort doesn’t pay off, the company would go out of business. So these stocks are inherently risky.

They can also move a lot in a single day and not everyone can stomach this kind of volatility.

An added problem is that small-cap stocks are not as well-known because usually analysts don’t cover them. So there’s limited information about them. You have to largely do your own research on the market, the scope of growth and also the company’s performance. This is not easy to do.

But for those that want to put in the effort, this is a way to uncover that one stock that will grow into a mega-cap and offset all the losses that you’ve made everywhere else. Since mutual funds and institutional investors are usually not invested in them, you can also bet on the fact that they will jump in later, when the company is on stronger footing. And this of course will send share prices even higher, helping you multiply your gains.

So while it’s clear that small-cap stocks are very risky, they are also the source of big gains for investors who are willing to do the hard work and then take some risk.

At Zacks, we have the means of reducing the hard work and lowering the risk with proprietary technology captured in the Zacks Rank for stocks, the Zacks Industry Rank and the style scoring system that can be combined with other data to separate the grain from the chaff.

That’s what I’ve attempted to do here with these 5 stocks that are all under a billion dollars in market cap-

Titan Machinery (TITN Quick QuoteTITN - Free Report)

Titan Machinery has been around for several decades. So it’s a relatively lower-risk stock. The company owns and operates a network of full-service agricultural and construction equipment stores in the U.S. and Europe under the CNH and other brands. Its agricultural equipment includes machinery and attachments for use in the production of food, fiber, feed grain, renewable energy, as well as and home and garden applications.

Its construction equipment comprises heavy construction machinery, light industrial machinery for commercial and residential construction, road and highway construction machinery, and energy and forestry operations. It also rents equipment and offers repair and maintenance, and other services. Titan Machinery is headquartered in West Fargo, North Dakota.

Titan Machinery shares carry a Zacks Rank #1 (Strong Buy) and Growth Score A. It belongs to the Automotive - Retail and Whole Sales industry (top 9% of Zacks-classified industries). Buy-ranked stocks that also belong to attractive industries have better chances of appreciation in the near term. And a Growth Score of A or B is another indicator of potential growth.

Titan Machinery shares are up 64.6% year to date. And there’s good reason to think that this winning streak will continue into 2022.

Although there’s a single analyst providing estimates, the surprise history seems to indicate that he is quite conservative (Titan Machinery topped estimates in each of the last four quarters at an average rate of 93.3%). The current expectation is for the company to grow revenue and earnings by a respective 24.8% and 103.2% in the year ending Jan 2022. In the following year, Titan Machinery is expected to grow revenue and earnings by 0.4% and 12.3%, respectively.

What’s more, the estimate revisions history is positive, with current-year estimates moving up from $1.95 to 2.56 over the last 90 days. The estimate for the following year has gone from $2.45 to $2.87.

USA Truck

USA Truck has also been here for almost as long as Titan Machinery. So of course, it’s another company with relatively low risk. The company operates as a truckload carrier in the U.S., Mexico and Canada and operates through the Trucking and USAT Logistics segments.

The Trucking segment offers truckload motor carrier services as a medium-haul common and contract carrier; and freight services. The USAT Logistics segment offers freight brokerage, logistics and rail intermodal services. As of December 31, 2020, the company operated a fleet of 2,065 tractors, which included 628 independent contractor tractors; and 6,263 trailers. USA Truck is headquartered in Van Buren, Arkansas.

USA Truck shares carry a Zacks Rank #2 (Buy) and Growth Score A. It belongs to the Transportation – Truck industry (top 8%).

Shares of USA Truck are up 116.3% year to date. And in all probability there will be additional upside next year.

The Zacks Consensus Estimate for USA Truck has been solidly beaten in the last four quarters at an average rate of 68.7%. And current estimates (provided by 2 analysts) are calling for 19.3% growth next year, on top of the 220.6% growth this year. The estimate revisions history is also positive. 

OneWater Marine Inc. (ONEW Quick QuoteONEW - Free Report)

OneWater Marine is a premium recreational boat retailer operating principally in the United States. It offers new and pre-owned boats, yachts, parts and accessories, finance and insurance products, maintenance and repair services and ancillary services. It also rents boats and other watercraft. As of September 30, 2021, it operated 70 stores across 11 U.S. states. OneWater Marine is based in Buford, Georgia.

OneWater Marine shares carry a Zacks Rank #1 and Growth Score A. It belongs to the Leisure and Recreation Products industry (top 22%).

OneWater Marine shares are up 82.8% year to date. The four analysts covering it expect revenue and earnings for the current year ending Sep 2022 to increase a respective 24.1% and 14.4%. The estimates for the following years are expected to increase a respective 8.0% and 4.6%. But the substantial increases in estimates for both years indicate that actual growth will be significantly higher.

The current-year estimate, for instance, is up $1.01 (14.5%) in the last 90 days while the estimate for the following year is up 71 cents (9.3%) during the same time period. What’s more, the company has topped estimates in each of the last four quarters at an average rate of 186.2% although admittedly, the surprise percentage has come down quite a it in the last two quarters.

Beazer Homes USA, Inc.  (BZH Quick QuoteBZH - Free Report)

Beazer Homes USA designs, builds and sells single family homes. The company designs homes to appeal primarily to entry-level and first move-up home buyers. Its objective is to provide customers with homes that incorporate quality and value. The company's subsidiary, Beazer Mortgage, originates the mortgages for the company's home buyers.

Beazer Homes shares carry a Zacks Rank #1 and Growth Score A. They belong to the Building Products - Home Builders industry (top 39%).

While Beazer Homes shares have appreciated an impressive 49.9% year to date, there seems to be further upside in them.  That’s because of the company’s strong earnings potential. In the year ending Sep 2022, analysts expect the company to grow revenue and earnings by 13.6% and 23.7%, respectively.

The following year, growth is expected to be 9.2% and 6.4% respectively. But a look at the estimate revisions trajectory seems to indicate that these numbers are only preliminary and actual growth will be much higher. The estimate for 2022 is up $1.56 (44.8%) in the last 90 days. The 2023 estimate is up $1.34 (33.6%) during the same time period. The earnings beat in the last quarter of 91.5% is greater than the 49.9% average surprise in the three preceding quarters.

Chico's FAS, Inc.

Chico's FAS is a cultivator of brands serving the lifestyle needs of fashion-savvy women 30 years and older. Their three brands are Chico's, White House Black Market and Soma. Their brands are all specialty retailers of private label women's apparel, accessories and related products. The company currently operates boutiques and outlets throughout the U.S. and Canada, and also has an online presence for each brand.

The Zacks Rank #1 stock has a Growth Score of A and belongs to the Retail - Apparel and Shoes industry (top 22%).

Chico's FAS shares are up 211.4% over the past year. Analyst estimates indicate that while growth rates could come down as the reopening excitement wanes (or the Omicron scare changes things) the overall level of business will continue to recover and grow.

As a result, despite growing 37.7% in the current fiscal year ending Jan 2022 revenue is expected to grow another 5.0% the following year. The same is true for per share earnings. The current year will see the reversing of a $3.11 loss in the prior year to record profit of 37 cents this year.

The following year, Chico's FAS earnings are currently expected to grow 23.0% to 45 cents. What’s more, the current year estimate has more than doubled in the last 30 days although the 2023 estimate is just up just a penny.
 

3-Month Price Performance

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