Microcap investing is undoubtedly risky. However, the thinly traded nature of microcap stocks often contributes to asymmetrical upside returns. Moreover, numerous microcap stocks are secured by emerging entities, meaning investors benefit from future growth prospects.
In the past month, the iShares Micro-Cap ETF (NYSEARCA:IWC) has shed nearly 5% of its market value, suggesting a “buy the dip opportunity” has emerged in microcap stocks as a sub-asset class. However, as previously mentioned, microcap stocks are thinly traded mainly due to their lack of exposure. As such, I embarked on a journey to seek information about three best-in-class microcap stocks.
Considering the above, I applied a screening process examining fundamental aspects, valuation multiples and idiosyncratic events. Moreover, I ensured each pick didn’t have negative press surrounding it, as many microcap stocks often do.
If you’re in the market for microcap stocks, here are three stocks under $3 with breakout potential worth considering.
CommScope (COMM)
CommScope (NASDAQ:COMM) is a U.S.-based company that designs, manufactures and installs network infrastructure products. Its stock trades at around $1.15 per share after sustaining a year-to-date loss of nearly 60% due to internal and systematic events. Despite its capitulation, COMM stock is a good investment; here’s why.
Firstly, COMM stock’s sharp decline has dragged its price multiples into relatively undervalued territory. For example, COMM stock now has a price-to-sales ratio of merely 0.05x! Additionally, CommScope delivered a stellar first-quarter earnings report in May, revealing a revenue beat of $100 million and an earnings-per-share beat of 16 cents, providing a potential turning point.
CommScope faces risks, namely a struggle for profitability and a recent downgrade by JPMorgan (NYSE:JPM). Nevertheless, I think the company’s ten-year compound annual growth rate of 3.9% will coalesce with its price multiples and recent earnings beat, leading COMM stock into a recovery.
I’m bullish here!
Rimini Street (RMNI)
Rimini Street (NASDAQ:RMNI) provides end-market software support to companies like Oracle (NYSE:ORCL), Microsoft (NASDAQ:MSFT) and SAP (NYSE:SAP). The firm has over 2,100 employees globally, supports over 600 software products and claims to have saved its customers over $8 billion. Although a small-cap firm, Rimini’s salient features suggest it is bound to scale.
I decided to explore the company due to its nimble business model, which operates at a low-cost base and services a niche requirement. Moreover, I think Rimini Street will benefit from the systematic growth embedded in the cloud industry, providing it with a comprehensive opportunity set. Rimini’s current results show that it has already benefitted from the above, achieving profitability and a steady Return on Assets (ROA) ratio of 8.07%.
Lastly, Rimini Street’s short-term variables are well-aligned. It released its first-quarter earnings report in May, beating its estimate by $490,000, concurrently dragging its price-to-sales ratio (currently 0.6x) into investable territory.
As with CommScope, RMNI is risky but possesses upside potential.
GrafTech International (EAF)
GrafTech (NYSE:EAF) International manufactures graphite electrodes and petroleum coke, serving an array of end markets. The company is headquartered in Ohio but operates a nimble manufacturing ecosystem with facilities in other U.S. states, Mexico and Europe. Although a small-cap stock, I have tremendous belief in GrafTech, given the ever-increasing demand for industrial goods and the company’s niche business model.
The firm recently proved its potential when it surpassed its first-quarter earnings estimates. GrafTech’s revenue settled at $136.58 million, exceeding its target by $10.89 million. Moreover, GrafTech’s earnings-per-share surpassed estimates by three cents. Although a point-in-time observation, GrafTech’s first-quarter report illustrates a turning point after the firm suffered disappointing results.
Furthermore, GrafTech might benefit from market-impact-related activities. On May 17th, its largest shareholder, Colonial House Capital, bought an additional 332,770 shares at around $1.72 per unit. Although Colonial House’s rationale is unclear, the event suggests that GrafTech’s fundamental prospects might be underestimated.
Finally, EAF stock has a price-to-sales ratio of merely 0.42x, indicating it has absolute value in store.
I’m bullish about EAF stock’s prospects, as I think a turnaround opportunity is in the cards!
On the date of publication, Steve Booyens did not hold (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.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.
