In the previous article, we wrote about how stocks have been the best-performing assets in the United States. This has made people who have been long-term investors in stocks very wealthy. A good example is a person who invested in a company like Shopify have more than doubled their money. This is because the stock is up by more than 1,400% since its IPO. In this article, we will look at some of the best small cap stocks to invest in 2021.
- 1 What Are Small Cap Stocks?
- 2 Why Invest in Small Cap Stocks?
- 3 Top Small Cap Stocks for 2021
- 4 PageDuty (PD) | Technology
- 5 Zumiez (ZUMZ) | Retailer
- 6 EverQuote (EVER) | Technology
- 7 Land’s End (LE) | Retail
- 8 Purple Innovation (PRPL) | Retailer
- 9 Lending Club (LC) | Technology
- 10 The On Deck Capital (ONDK) | Technology
- 11 PRA Group (PRAA) | Financial
- 12 Vera Bradley (VRA) | Retail
- 13 Risks of Investing in Small Cap Stocks
- 14 Summary of the Best Small Cap Stocks to Invest in 2021
What Are Small Cap Stocks?
There are more than 3000 stocks that are listed in the United States. All these stocks are not equal. They are put into several categories. There are categories that are based on the industries. These industries include technology, retail, energy, and finance among others.
Companies are also categorized according to sizes. Examples of these categories are mega cap stocks that are valued at more than $100 billion. There are large cap stocks that are valued at more than $20 billion and mid-cap stocks that are valued at more than $10 billion. Small cap stocks are usually valued at between $200 million and $2 billion. These categories are usually fluid and there are people who categorize them differently.
Why Invest in Small Cap Stocks?
There are two main reasons why people invest in small cap stocks. First, investing in small stocks is to place a bet on America. This is true because most small cap stocks are usually based in America. They derive most of their income in the United States and not abroad. Second, in many cases, small cap stocks tend to have a long runway for growth. For example, it is easy for a company that is valued at $1 billion to double its price than a company that is valued at $100 billion. The chart below shows the performance of the Russell index, which is usually made up of small cap stocks.
Top Small Cap Stocks for 2021
PageDuty (PD) | Technology
PagerDuty is a technology company that launched its IPO in 2019. The company provides on-call and response management services to companies. It offers its services to thousands of companies around the world. After its IPO, the company’s stock rose to a high of $57. It then declined and reached a low of $21. This was partly because of the rotation that moved from growth stocks to value stocks. This year, there is a likelihood that PagerDuty will rise if it demonstrates that it can grow its revenue. This makes it one of the best small cap stocks to invest in 2020.
Zumiez (ZUMZ) | Retailer
Zumiez is an American multinational specialty retail company that has a market valuation of more than $800 million. In 2019, the company’s stock rose by almost 50% as investors cheered its growth. The company has managed to grow its revenues from more than $478 million in 2013 to more than $978 million in 2018. It is expected to have crossed $1 billion in 2019. At the same time, the company has been growing its net income. In 2020, with tariffs set to decline, the company is expected to continue growing. This makes it an ideal small cap retail company to buy.
EverQuote (EVER) | Technology
EverQuote is an American company that is valued at more than $785 million. The company offers a platform where users can take insurance quotes and buy premiums. In 2019, the company’s stock grew by more than 470% as investors cheered its growth. Its revenue has grown from $122 million in 2016 to more than $163 million in 2018. The question that many are asking is whether the company has more room to grow. The answer is that this is a risky stock because of how high it has risen. However, if the bull run continues, there is a likelihood that it will continue to rise.
Land’s End (LE) | Retail
Land’s End is an American retailer that was spun-off from Sears in 2002. In the past five years, the company’s stock has declined from a high of $53 to a low of $7. This has seen its valuation drop to below $500 million. This has happened even as its revenue has increased from $1.42 billion in 2016 to more than $1.45 billion in 2018. This is because the management has been trying to turn around the company. In 2020, the stock, which is oversold technically could become one of the top small cap stocks to buy.
Purple Innovation (PRPL) | Retailer
If you listen to podcasts, chances are that you have heard adverts on Purple. Purple is a company that sells boxed mattresses. It has become very popular with millennials. This has seen its revenue increase from more than $196 million in 2017 to $285 million in 2018. It is expected that the company made more than $422 million in 2019. This is excellent growth that is also reflected in the company’s stock price. The stock has risen by more than 105%. This year, the company could continue to grow. Also, investors will be watching closely the numbers of Casper, another mattress firm that is expected to IPO.
Lending Club (LC) | Technology
Lending Club is a fintech company that offers a peer-to-peer lending services. It is the biggest P2P company in the world and is valued at above $1 billion. In 2019, the company saw its stock continue to drop. It dropped by more than 20%. The current pricing is much lower than when the company was valued at more than $15 billion. In 2020, the company’s stock, which is currently oversold will likely make some gains. This is partly because management is trying to conduct a turnaround. There is a likelihood that the stock could rise to about $14. This will depend on the numbers it will report in the coming quarters.
The On Deck Capital (ONDK) | Technology
On Deck Capital is a fintech company that gives out loans to small businesses. It is one of the best small cap stocks to invest in 2020. Since its founding, On Deck has raised given out more than $12 billion to companies. It is now valued at more than $290 million and the stock has dropped by more than 80% from its peak. This decline is partly because investors are worried about the future of this model. However, the company is clearly undervalued considering that it is expected to make $445 million in 2019 and $472 million this year. The company has also recently turned a profit, which is a rare thing for such companies.
PRA Group (PRAA) | Financial
PRA Group is an American company that is valued at more than $1.6 billion. The company has annual revenues of more than $1.6 billion and an annual net income of more than $65 million. PRA is one of the biggest buyers of non-performing debt. The company acquires these loans and returns them to banks and other lenders for a fee. In 2019, the stock rose by more than 30%. In 2020, there is a likelihood that customer defaults will likely increase, which will likely lead to more demand for its services. This will likely push its stock from the current $36 to more than $45.
Vera Bradley (VRA) | Retail
Vera Bradley is an American bag retailer that has a market value of more than $376 million. The company’s stock rose by more than 20% in 2019 as the company continued to show some improvement. The company’s stock is still undervalued, which is partly because of the cyclical nature of the retail industry. In 2020, there is a possibility that the stock will rise to above $40.
Risks of Investing in Small Cap Stocks
In summary, we believe that small cap stocks will have a good year in 2020. However, you need to understand the risks of investing in these stocks. First, some of these companies tend to be in a period of long-term decline. This means that buying them has a risk. Second, some of these companies usually have a lot of debt, which can hinder growth. Third, some of these companies don’t pay dividend or buyback their shares.
Summary of the Best Small Cap Stocks to Invest in 2021
There are two ways you can invest in small cap stocks. You can stock-pick these stocks or you can decide to buy the Russel 2000 or 1000 indices. Investing in indices is a good thing because it allows you to diversify your returns. If you decide to stock pick, we hope that you will do a lot of research before you invest.