3 off-the-radar small-cap growth stocks I bought in August
For nearly 17 months, investors have been enjoying what is arguably the biggest rebound from a bear market bottom in history. Since last weekend, the benchmark S&P 500 had doubled from its March 2020 coronavirus pandemic low. In other words, long-term investing is winning again.
But just because the stock market is seemingly hitting one new high after another, that doesn’t mean there’s no value to be had. Since the start of the month, I’ve opened or added positions in three small-cap growth stocks that I can assure you are off the Wall Street radar.
The first stock that I was looking forward to adding to my portfolio is the American Marijuana Stock Jushi Holdings (OTC: JUSHF). The main reason I hadn’t added it earlier was The Motley Fool’s transparent disclosure policy. To sum up, I couldn’t stay long enough without congratulating Jushi in writing for purchasing it for my personal wallet – until the beginning of the month (August 3), that is.
The important thing to understand about American cannabis stocks is that they don’t need federal legalization to be good. With 36 states legalizing marijuana to some extent, cannabis stocks simply need the Department of Justice to maintain its no-interference policy, which appears to be the position to go. According to New Frontier Data, the U.S. cannabis industry could generate $ 41.5 billion in annual sales by 2025.
Compared to other multistate operators (MSOs), Jushi is a tiny bit. It has only 20 operational dispensaries and plans to open seven more before the end of the year. What’s much more intriguing about the company is how it was chosen to expand its reach. Jushi hopes to generate 80% or more of his income this year from the Pennsylvania, Illinois and Virginia trio.
All three are limited license states. Pennsylvania and Illinois limit the number of retail licenses that will be issued in total and to a single company, while Virginia assigns licenses by jurisdiction. By targeting limited license states, Jushi ensures that he won’t be overrun by an MSO with deeper pockets.
Another selling point for Jushi, for me at least, was that insiders aligned their interests with those of shareholders. About $ 45 million of the first $ 250 million in capital raised by Jushi came from insiders and executives. Usually, good things happen when business leaders have their skin in the game.
While Jushi is expected to pass the recurring profitability milestone in 2022, the company’s insane growth rate also caught my attention. Although estimates vary – as one would expect from an industry with no real legal precedent – Jushi could reach nearly $ 1 billion in annual sales by 2024 or 2025. For the background, the company realized nearly $ 81 million in sales last year. .
By all accounts, Jushi seems to be the biggest deal in the cannabis business.
The second small-cap growth stock that I opened a new position on this month (August 12) is the online insurance market. Never quote (NASDAQ: NEVER).
I know what you are probably thinking, and yes insurance is a slow growing, boring industry. What makes EverQuote such an attractive company is its focus on digital advertising. The US insurance market will spend in the order of $ 154 billion through distribution and advertising in 2021, with this figure increasing by about 4% per year through 2024. Of that $ 154 billion, 6, $ 5 billion will be in digital spend, which is expected to grow 16% per year through 2024. It’s this digital ad spend space that EverQuote calls home.
EverQuote’s online insurance marketplace is designed to be of benefit to consumers and insurers. With 19 of the top 20 auto insurers on board, consumers are able to quickly compare purchase policies and make an informed decision. Meanwhile, insurers are getting more for their advertising dollars. Since the people who get quotes on the EverQuote platform are motivated / qualified buyers, insurers see a better return on their marketing capital. About 1 in 5 consumers who get a quote buy a policy.
The company is also expanding its reach into new verticals, including home, tenant, business, health and life insurance. These new verticals have consistently grown revenues at a faster rate than auto policies, and they represent the perfect complementary opportunity for EverQuote’s online market platform.
Finally, EverQuote’s operating metrics get my full attention. The company’s variable sales margin increased from 24.2% in 2015 to 31.3% in 2020, while sales grew by an annual average of 29% over the same period. With EverQuote, like Jushi, on the cusp of recurring profitability, the sky could be the limit.
The original bark company
The original bark company (NYSE: BARK) is the third off-the-radar small-cap growth stock that I bought in August (also August 3), although this purchase only added to my existing position.
As the name suggests, Bark is a dog-centric product and service company. While the pet industry isn’t the fastest growing, it’s about as recession-resistant as you’ll ever find. Data from the American Pet Products Association shows that it has been more than a quarter of a century since year-over-year spending on pets has declined in the United States. It is estimated that $ 109.6 billion will be spent on our furry family members in 2021, with over $ 44 billion expected to be spent on food and treats. Forgive the pun, but this is where Bark comes in.
One of the biggest advantages of Bark is that it is a subscription-based business. About 90% of the company’s $ 117.6 million in second-quarter sales came from online subscriptions, with the remainder coming from products placed in about 23,000 retail stores across the United States. Focusing on subscriptions means less overhead and much more predictable cash flow. .
Speaking of subscriptions, Bark increased its number of active subscribers from 663,000 at the end of fiscal 2020 to around 1.8 million, at the end of the second quarter of fiscal 2022. This rapid growth in number of subscribers enabled the company to maintain an annual growth rate of 20% to 30% until fiscal 2026, and even beyond.
Innovation is also essential with Bark. In addition to its monthly deliveries of BarkBox treats and toys, the company launched two services last year that are likely to become key to its long-term success. Bark Home offers a variety of essentials products and accessories, such as dog beds, leashes and collars. Meanwhile, Bark Eats is working with the owners to create a personalized dry diet. Adding these new services results in a significant increase in additional sales, which should be good news for Bark’s already impressive gross margin of around 60%.
Bark quickly became one of my favorite stocks to buy, and I expect it to outperform the overall market over the next decade.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.