Multi-billionaire investor Ken Fisher wrote recently that the stocks of relatively small companies tend to be very unpopular with the Street during the early phase of bull markets. Therefore, Fisher’s advice at this point in the cycle is that investors buy only large-cap firms. But for long-term, risk-tolerant investors, another approach is to purchase the undervalued stocks Wall Street is missing because of its current aversion to relatively small companies. Then, once the bull market become more mature, the value of these small companies will likely soar. Here are three small and beaten up contrarian stock picks for patient investors to consider.
Exact Sciences (EXAS)
Exact Sciences (NASDAQ:EXAS) stock had tumbled nearly 27% over the last six months. Yet the company reported strong third-quarter financial results on Nov. 1 and has multiple strong positive catalysts.
Last quarter, EXAS’s revenue jumped 20% versus the same period a year earlier, while it generated positive EBITDA of $61.68 million, versus an EBITDA loss of $98 million in Q3 of 2022.
Going forward, the company is well-positioned to benefit from the introduction of its next-generation Cologuard test. The new test, with a much lower false positive rate, combined with America’s ever-increasing inability to keep up with the demand for colonoscopies, should greatly increase its sales. Keep in mind however, the new version isn’t slated to be launched until early 2025.
Moreover, EXAS has developed a molecular residual disease (MRD) test that can be used to detect tumor risks in the body after cancer treatment. The company expects to launch both of its MRD tests, for colon and breast cancer, in the U.S. by early in 2024. EXAS believes the tests could help 2 million Americans.
Stem (STEM)
Stem (NYSE:STEM) develops AI-based solutions that enable companies to use electricity more efficiently. Amid the electric-vehicle and renewable-energy revolutions, the demand for solutions which help firms utilize electricity more efficiently is booming.
Providing evidence for that assertion, Stem’s revenue jumped 34% year-over-year (YOY) in Q3 to $133.7 million. Meanwhile, it booked an incredible total of $676.4 million of projects, roughly double the amount that it had expected. What’s more, the firm now expects to generate positive EBITDA for the first time in 2024.
The company now has a tiny forward price-sales ratio of 0.5. Further, it had $125 million of cash as of the end of Q3, while it only used $4 million for its operations and its total cash flow came in at $22.8 million. As a result, Stem probably won’t have to raise more cash anytime soon. That makes STEM stock one of the best contrarian picks available.
Shoals (SHLS)
Shoals (NASDAQ:SHLS), which makes and markets electrical equipment used in solar projects, also reported very strong financial results. Its revenue soared 48% YOY to $134 million, and its EBITDA, excluding certain items, jumped 81% to $48 million.
The company reported on its Q3 earnings call that the demand for its products would be negatively impacted by slowing growth in the U.S. solar sector. They claim this is due to “higher interest rates, lingering uncertainty about the IRA, supply chain constraints and interconnection complications.”
Still the company’s backlog climbed 34% YOY, indicating that its business is still expanding quickly despite those challenges. Moreover, I expect the solar sector to recover from those issues over the longer term as each matter gets resolved.
The forward price-earnings ratio of SHLS stock is 14.8. That’s a very low valuation, given the company’s rapid growth and strong prospects.
On the date of publication, Larry Ramer held long positions in EXAS, STEM, and SHLS. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
