These Small-Cap Sectors Have The Biggest Upside Over the Next Decade

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Over the past two decades, some of the best and highest-yielding investments have been made by investors who recognized the potential of small-cap stocks. 

You really don’t have to look very far to find small caps (market capitalizations ranging from $300 million to $2 billion) that have turned into multibaggers over the years:

  • EV maker Tesla Inc. (NASDAQ:TESLA) was valued at just over $1B shortly after its 2010 IPO. A  decade later and Tesla has grown into the world’s most valuable automaker with a market cap more than 200x bigger than its IPO valuation. That’s a 20,000% return for investors who bought and held through Tesla’s epic journey.
  • Online retailing giant, Amazon Inc.(NASDAQ:AMZN) started its odyssey as an online bookseller with a share price of $1.50 in 1998. AMZN shares are now changing hands at $3,176-a-pop, or a stupendous return of 211,733% over 23 years.
  • Video streaming juggernaut, Netflix Inc.(NASDAQ:NFLX), has been one of the best-performing household stocks over the last decade-and-a-half, with its market cap jumping from $600 million in 2005 to $206B in August 2020 thus returning a whopping 34,300%.
  • Skyworks Solutions (NASDAQ:SWKS) was a little-known company before its prowess in making mobile chips helped its market cap soar from $800 million in 2006 to $25B currently.
  • One of the world’s largest online travel agencies (OTA), Booking Holdings (NASDAQ:BKNG), has seen its market cap explode from $950 million 14 years ago to $74B currently.
  • One of the most successful cloud-based software companies, Salesforce.com (NYSE:CRM), has seen its market cap soar from $1B in 2004 to $175B currently.

One common theme about these super-successful companies is that early-in investors who caught them when they were sitting on the cusp of megatrends such as clean energy, eCommerce, the mobile revolution and cloud computing realized truly outsized gains that beat average market returns many times over.

They say hindsight is 20/20 but early investors with an eagle eye can still spot emerging megatrends that will power the next wave of big winners, and small-caps are among the best bets.

Despite their higher potential for growth, small-cap stocks have lately been neglected simply because most investors are too focused on bigger and well-known cult stocks such as Amazon, Tesla, Netflix and Apple Inc. (NASDAQ:AAPL). Indeed, the now well-worn playbook of investing in tech and popular FAANG stocks is a big reason why small-caps have lagged their bigger brethren over the past decade.

But here’s a big secret: Asset class performance has historically been mean-reverting, meaning that long periods of underperformance are frequently followed by equally long periods of outperformance.

This disinterest in small-caps has created rare opportunities to find strong companies that are worthy of your attention. Here are small-caps lying in the intersection of megatrends that could outperform in the 2020s.

#1 Megatrend: EVs

Lately, investors can’t seem to get enough of EV companies, thanks in large part to the ESG boom as well as the continuing shift from fossil fuels to cleaner energy sources with lower emissions and carbon footprints.

The de facto leader of the space,TSLA, has been on a tear, surging nearly 600% in the year-to-date after scoring big success at its Gigafactory 3 in China where it’s expected to sell 150K vehicles in only its first year of operations there. This has helped alleviate fears that ultra-low oil prices would act as a disincentive for people looking to make the switch from gas-burning vehicles to EVs.

While Tesla remains a good pick, the smaller EV companies that are just getting started might offer the biggest returns down the road. These include companies such as:

  • Electrameccanica Vehicles (NASDAQ:SOLO)–A Canadian designer and manufacturer of EVs, with its flagship, purpose built, single-seat electric vehicle dubbed SOLO. Electrameccanica currently sports a share price of $2.62 and market cap of $173M.
  • Kandi Technologies Group (NASDAQ:KNDI)–A China-based EV company involved in the development, production and distribution of EV products, EV parts and off-road vehicle products. KNDI has a market cap of $473.4M with shares trading at $8.77.
  • Workhorse Group (NYSE:WKHS)–an Ohio-based company that designs and builds high performance EVs and aircraft. WKHS sports a market cap of $1.62B and a share price of $15.12. The shares have enjoyed a huge runup after rallying 407% in the year-to-date.

#2 Megatrend: Renewable energy

Just like the EV sector, renewable energy stocks have lately turned red-hot: Invesco WilderHill Clean Energy ETF (PBW), an ETF designed to track US-listed stocks in the Clean Energy sector, has returned 56.8% YTD and 80.1% over 52 weeks thanks again to the unstoppable ESG momentum.

Renewables such as wind and solar have continued to post solid growth even during the pandemic thus proving the resilience of the sector. The sector has also been booming as the costs of renewables continue to fall thus making them competitive with fossil fuels.

Some of the top small-cap picks in the renewables sector include:

  • Bloom Energy Corporation (NYSE:BE)– a California-based manufacturer of solid oxide fuel cells used in the production of electricity on-site. BE sports a market cap of $1.75B and a share price of $14.48.
  • Renewable Energy Group Inc.(NASDAQ:GS)– an Iowa, renewable energy company engaged in the production of biofuels and renewable chemicals. GS has a market cap of $1.57B with shares trading at $39.63.
  • Daqo New Energy Corp.(NASDAQ:DQ)–a Chinese company that manufactures monocrystalline silicon and polysilicon. DQ, a top pick in the Invesco WilderHill Clean Energy ETF (PBW), sports a market cap of $1.64B with shares changing hands at $116.68

#3 Megatrend: Hydrogen Fuel Cells

Like EV and renewable energy companies, stocks of hydrogen fuel cell manufacturers have been booming thanks to hydrogen power emerging as a good complement to renewable energy. Due to the intermittent nature of wind and solar in power generation, incorporating hydrogen helps to stabilize the power grid by providing a highly stable and predictable flow of electricity.

The EU has lately touted a hydrogen economy in its latest topline targets as an important aspect in fighting climate change and has set an ambitious goal to build 40GW of electrolyzers within its borders over the next decade.

Source: Energy.gov

Unfortunately, the hydrogen fuel cell market is littered with microcaps one the lower end of the spectrum and mid-caps on the higher end and no small caps in-between. Nevertheless, some of the better picks here include:

  • Plug Power Inc.(NASDAQ:PLUG)–perhaps the best-known among fuel cell companies, PlugPower has built a successful niche developing technology for forklifts where fueling times can be critical. PLUG features a market cap of $3.8B and a share price of $11.36.
  • Ballard Power Systems (NASDAQ:BLDP)–manufactures fuel cells for forklifts, buses, and marine applications. BLDP has a market cap of $3.5B and  share price of $14.77.
  • Bloom Energy–about a year ago, Bloom Energy announced that it had developed fuel cells that can run on hydrogen and generate zero-carbon electricity. The fuel cells can be deployed for backup power and microgrid applications.
  • FuelCell Energy, Inc. (NASDAQ:FCEL)–based in Connecticut, FuelCell Energy designs, manufactures and operates fuel cell plants that run on biogas and natural gas with more than 50 plants across the globe. FCEL sports a market cap of $602.5M and a share price of $2.83.

Other top small-cap picks spanning various megatrends include:

#4 Megatrend: Big Data

  • Cardlytics Inc. (NASDAQ:CDLX)–partners with banks to run their loyalty programs in exchange for access for the banks’ payment card data. Cardlytics then uses this information to match the right products and promotions with the right consumers. Cardlytics currently sports a market cap of $2B with shares trading at $80.16.

#5 Megatrend: 5G

  • Inseego Corp. (NASDAQ:INSG)–an industry pioneer that enables high performance mobile applications for large service providers, enterprise verticals and small-medium businesses (has an ongoing partnership with Verizon). INSG has a market cap of $1.2B with shares changing hands at $12.27.

#6 Megatrend: Conversational Commerce

  • LivePerson Inc. (NASDAQ:LPSN)–develops conversational commerce and AI software. LPSN has a market cap of $3.7B and a share price of $58.65.

#7 Megatrend: Space

  • Maxar Technologies (NYSE:MAXR)–a Colorado-based space technology company that specializes in manufacture of Earth observation/radar equipment and on-orbit servicing. MAXR sports a market cap of $1.58B with a share price of $27.65.

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