In investing, small companies have a special position. They come with more risk due to their less diversified business models and less substantial balance sheets. But if things go right, small firms can generate much larger returns than the average S&P 500 constituent. As such, it’s worth checking in on the best micro-cap stocks to buy today.
That’s especially true with the market down so sharply from its prior highs. Many firms are down 70 percent, 80 percent, and sometimes even 90 percent from their highs. That should create many opportunities for when sentiment improves and these pummeled stocks start to turn the corner.
Investors should do extra due diligence on microcap stocks to buy as there tends to be more risk. But in the case of these three micro-cap stocks, the reward will be considerable if things play out as management intends.
Micro-Cap Stocks to Buy: Finance of America Companies (FOA)
Like many microcaps today, Finance of America Companies (NYSE:FOA) started out as a SPAC. Shares have fallen from the opening $10 price to around $1.50 now.
Arguably, investors set their expectations too high for Finance of America when it went public. The firm is a small company focused on consumer credit, an industry that doesn’t tend to support high valuation multiples. Throw in rising interest rates and the potential for a rise in bad credit thanks to a weakening economy, and it’s not hard to see why FOA stock fell out of favor.
However, the firm is at a value price now, selling for just 0.3x book value and a single-digit forward P/E ratio. And there’s more.
The company recently announced an acquisition, buying direct-to-consumer reverse mortgage firm American Advisors. The company also announced a new CEO as part of its business model transition. Shares popped more than 15% this week on the news, and this could be the start of a bigger move if traders warm to this new strategy.
Yellow Corporation (YELL)
Yellow Corporation (NASDAQ:YELL) is a trucking company. In addition to having a memorable ticker symbol that could win its social media favor, Yellow has plenty of other attractive traits.
For one thing, the company has a market capitalization of merely $100 million, yet it generated more than $5 billion in revenues last year. That’s one of the lowest price-to-sales multiples you’ll see at a publicly traded company.
The P/S multiple of merely 0.02 hints at the company’s issue: Low profit margins. Trucking is a brutally competitive business and one tied to the economic cycle. Last year was a good one, and YELL stock goes for less than 5x trailing earnings.
However, traders anticipate a more difficult year in 2023 as the economy weakens, which would hit demand for trucking services. That’s certainly possible. But if the Federal Reserve can manage a soft landing, YELL stock could enjoy a huge turnaround.
The stock traded at $14 less than two years ago, after all, and is now at less than $2. Shares are already priced for a major economic downturn. Given its shaky balance sheet, if the economy does tank, it could be the end of the road for Yellow. But if the economy hangs in there, Yellow could see a massive rebound.
Bark (NYSE:BARK) is a specialty pet products company. The firm is most known for its Barkbox subscription service. In it, the company sends members a package full of dog toys every month at a set price. As Wall Street loves recurring revenue, this model gained favor, and Barkbox had a popular SPAC offering.
However, the dog toy market may have been too niche for a successful publicly traded company. Bark has struggled to reach profitability, and growth has slowed as the pandemic-driven pet spending trend has tapered off.
But Bark still has options. For example, the company has launched a dog food service. Arguably, the addressable market for food should be larger than treats, and, in any case, there are substantial cross-selling opportunities to sell food and wellness products to customers that already have the toy subscription.
Bark continues to lose money, which explains the low share price. Eventually, the firm needs to work out a path to profitability. That said, it generates more than $500 million in annual revenues and has a well-liked brand. There are the pieces here for a successful business, or perhaps Bark could be an attractive takeover candidate for a larger e-commerce company.
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On the date of publication, Ian Bezek did not have (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.