Best Small Cap Stocks To Buy: A Golden Opportunity?

Best Small Cap Stocks To Buy: Investors looking for steady returns and limited risk tend to fill their portfolios with established large cap stocks. These brands are household names, and they often represent companies with a long history of steady success. Examples include Apple, Microsoft, Bank of America, and Disney.

However, focusing on large cap stocks to the exclusion of small and medium caps can ultimately be a risky strategy. Small caps tend to offer greater reward potential, making them an important component of a well-diversified portfolio.

What Is A Small Cap Stock?

Market capitalization or market cap refers to the market value of a company’s outstanding publicly-traded shares. Stocks are categorized as large, medium, and small cap depending on total market capitalization.

While exact definitions of the three categories can vary between brokerage firms, small caps are generally companies with market capitalization between $300 million and $2 billion.

Small caps certainly come with more risk than their medium and large cap counterparts, and it can be time consuming to complete the research necessary to choose wisely. Most institutions don’t invest in small caps, so there is limited analyst coverage. However, those challenges have a positive side.

Why Buy Small Cap Stocks?

Because large institutional investors and analysts don’t pay much attention to small caps, it is far more likely that individual investors can find great bargains on companies that are undervalued.

Better still, small caps have plenty of room for growth. By choosing solid companies with strong business models, investors can get on board with inexpensive small caps before they become market leaders.

The balance of small cap stocks in an individual portfolio depends on the investor’s financial goals and risk tolerance. As a general rule, experts recommend that small caps make up no more than 20 percent of a portfolio’s total stocks.

These are some of the best small cap stocks to buy:

Iconix Brand Group Stock

Iconix Brand Group presents itself as the world’s premier brand management company.

It represents a variety of global brands, including consumer favorites like London Fog, Joe Boxer, Cannon, Danskin, and Mudd.

The Iconix brand portfolio is diverse, extending to sports, fashion, home goods, and entertainment.

As a brand manager, Iconix works to increase the perceived value of specific product lines, as well as organizations as a whole. It uses proven techniques to grow awareness and establish brands as leaders in their respective industries, and it handles business development, public relations, marketing, merchandising, and licensing brands in global markets.

Iconix [NASDAQ: ICON] has struggled through some tough times, and share prices are currently quite low. However, the company’s leaders express confidence that its unique business model will ultimately prove successful. For example, Iconix has predictable revenue streams, because it receives contractually guaranteed minimum royalty payments. This gives the business some stability through market ups and downs.

Iconix [NASDAQ: ICON] enjoys higher EBITDA and net margins as compared to traditional operating apparel businesses, and it has no inventory, product, or operating risk.

Low overhead and negligible capital expenditure requirements coupled with strong free cash flow ensure Iconix can execute on its brand acquisition strategy. If all goes to plan, there is ample opportunity for accelerated growth rates in the near future.

Today, Iconix trades at under $2 – a long way from its all-time high of $44.22 in June 2014. For investors, this could be an exciting opportunity to get on board before share prices rise again.

Kingold Jewelry Stock

Kingold Jewelry is a Chinese company that was founded in 2002. It is one of the nation’s leading producers of 24-karat jewelry, and it sells product in both the wholesale and the retail markets.

In 2006, Kingold’s sales were just $29 million. Ten years later, the company boasted total sales of $1.4 billion.

The company’s management team is focused on growing those figures with a two-pronged strategy. First, Kingold [NASDAQ: KGJI] is increasing production capabilities. Second, the company is actively pursuing acquisition of complementary businesses to consolidate what is now a highly fragmented market.

Financial results for the first quarter of 2019 showed a year over year decline in total sales, which dropped from $539.5 million to $453.5 million.

The total amount of 24-karate gold products processed during this period was 22 metric tons – a year over year drop from the 23.3 metric tons processed in the first quarter of 2018.

Net income for Kingold [NASDAQ: KGJI] came in at $6.4 million, or $0.10 per diluted share – roughly half of the previous year’s first quarter results. However, business leaders assured investors that it still estimates total 2019 production at 110 – 120 metric tons.

The good news is that gross margin improved from 11.9 percent to 12.2 percent, thanks to increases in average selling prices and customized production.

If this was a US company, it might not make the list of small cap stocks to consider, but as a Chinese company there is definite profit potential.

Storing wealth in hard assets like gold is an important tradition in Chinese culture – particularly during hard economic times. If economic growth in China slows as expected, companies that trade in gold may see an uptick in sales. With current stock prices so low, buying shares now may be worth the risk.

Benitec Biopharma 

Big changes are coming to medical care. The prevention and treatment of deadly diseases is advancing rapidly, thanks to intense focus on personalized therapies that consider unique genetic characteristics.

Most investors are anxious to add biotechs to their portfolios in hopes of being in the right place at the right time – that is, when a major breakthrough is announced.

It’s impossible to say which of the current biotechs is poised to be the next big winner, so investors have to play the odds. Companies with strong financials and ground-breaking methodology have the most promise.

Some analysts believe that Australian Benitec Biopharma is on the verge of a breakthrough, thanks to its intensive research into gene silencing therapies for chronic and life-threatening diseases. Specifically, Benitec is exploring opportunities presented by DNA-directed RNA interference (ddRNAi). Ultimately, when it is perfected, this science could apply to a wide variety of gene-associated conditions.

For the moment, Benitec [NASDAQ: BNTC] is focused on therapies for the orphan disease Oculopharyngeal Muscular Dystrophy (OPMD), as well as the far more widespread Hepatitis B (HBV) virus.

It has also progressed in a potential therapy for head and neck squamous cell carcinoma, and it recently started work on gene-related amyotrophic lateral sclerosis (ALS) and frontotemporal dementia (FTD).

Progress in any of these will substantially improve the quality of life for those who have been impacted.

Few analysts have spent time evaluating Benitec [NASDAQ: BNTC], since its dramatic rise and sharp fall in August 2014. Today, shares trade at under one dollar, which could mean opportunity for investors. If Benitec succeeds in applying its proprietary technology to the treatment of serious disease, stock prices are likely to shoot up.

Best Small Cap Stocks To Buy: The Bottom Line

When it comes to small caps, the bottom line is that there is quite a bit of risk. Many of these companies ultimately fail.

However, the few that do succeed tend to generate massive profits for investors who took a chance early on.

Any or all of these three companies could prove to be the next rising star. Buying into a variety of small caps spreads the level of risk out and opens the door for investors to reap the rewards when one of today’s minor-league players heads to the majors.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.