Investing in micro-cap stocks allows you to potentially get in early on companies whose biggest and fastest growth is still in the future. If a company is successful, you, the investor, share in its growth and success since your stock makes you a partial owner in the company.
Many investors gravitate toward large-cap stocks of companies that are household names, such as Apple and Starbucks. Investing in such huge, already-successful companies certainly offers benefits. For example, large companies confer lower risk since they tend to weather economic storms better, and many of them pay handsome dividends, but there is also a downside. A company such as Wal-Mart simply does not have the room for future growth that you see with a startup or small retailer.
The terms micro-, small-, mid- and large-cap refer to a company's market capitalization, or market value. The number of outstanding shares a company has, multiplied by the price per share, gives its market capitalization. Starbucks, for example, trades at $57 per share and has about 1.48 billion shares outstanding. The company's market capitalization, therefore, is a little over $84 billion.
Companies with market capitalizations in excess of $10 billion are called large-cap companies. Starbucks, as you can see, easily fits into this category, as do Apple, Wal-Mart, Microsoft and other giant companies that dominate major industries. A mid-cap company is one with a market capitalization between $2 billion and $10 billion. Companies with under $2 billion in market capitalization are considered small-cap companies. The term "micro cap" describes a subset of small-cap companies that have market capitalizations under $300 million.
Large-cap stocks are associated with low risk but also low potential for big returns. Conservative investors like them for two reasons: they tend to be safer, especially during recessions and bear markets; and many large-cap companies pay dividends, which provide guaranteed, regular income. Small- and micro-cap stocks are riskier and more volatile, but the reward potential is greater. They rarely come with dividends, since small companies prefer to invest this money back into the businesses to fuel growth. These stocks are favored by growth investors who prefer the potential for rapid capital appreciation to the security of dividends.
One way to mitigate the risk of micro-cap stock investing is to diversify your holdings across many different companies and industries. The following are five promising micro-cap retail stocks to consider for 2016.
Kirkland's, Inc. (NASDAQ: KIRK) is a Nashville, Tennessee-based company that has been in business since 1966. The company sells home decor in 300 retail locations across 30 states. Its fundamentals are very strong heading into 2016. Its revenue growth is over 10%. The company has an operating margin near 5%, which, while not spectacular, is relatively strong for a brick-and-mortar retail operation. Best of all, Kirkland's is debt-free.
The fact that Kirkland's has a return on equity (ROE) greater than 12% is a good sign management is making good use of the company's assets. The company also has over $40 million in operating cash flow. The stock took a dip in 2015, losing over 40% of its value. Given the company's fundamentals, however, savvy investors should view the low stock price as a temporary discount sale on a promising company.
Destination XL Group
Destination XL Group, Inc. (NASDAQ: DXLG) was founded in 1976 and is headquartered in Canton, Massachusetts. The company operates retail stores that cater to big and tall men. One of the most attractive things about this stock is the company occupies a niche that has very little competition.
The company's fundamentals have some positives countered by areas of concern. Revenue growth, at 6.4%, was modest in 2015. Its debt picture is reasonable, with a 95% debt-to-equity (D/E) ratio. Operating cash flow is $24.1 million.
That said, 2015 was not the company's best year. Net income declined slightly, as did share price. However, Destination XL is in good financial shape, and a continually improving employment picture should increase the demand for the clothing items it sells.
Bebe Stores, Inc. (NASDAQ: BEBE) sells bold and flashy women's apparel and accessories in retail locations. Like Destination XL, the company was founded in 1976. Its headquarters are in Brisbane, California.
A quick glance at Bebe's most recent financial statements does not particularly inspire confidence. The stock lost over 80% of its value in the last 12 months and trades at under 50 cents per share as of January 2016. In 2015, the company's net income and revenue contracted.
However, several positive developments are percolating beneath the surface. Bebe installed a new CEO with a strong track record of growth. The company is in the midst of expanding its international presence. It has also ceased running costly promotional deals that were not producing revenue gains. Lastly, and perhaps most strikingly, the company has no debt.
Tilly's, Inc. (NYSE: TLYS) is headquartered in Irvine, California, and sells sportswear at retail locations. Its merchandise is geared primarily toward surfing, skateboarding, snowboarding and motocross enthusiasts. The company was founded in 1982.
Fundamental analysis reveals several positive signs. The company's revenue increased by nearly 8% in 2015. Tilly's has very little debt, with a D/E ratio of only 1%. The company's operating cash flow is over $33 million, and its return on equity (ROE) is a respectable 7.3%.
On the downside, 2015 was not a banner year for Tilly's stock. Its share price decreased by over 40%. However, if you view the company with optimism after examining its fundamentals, you might consider its low share price to represent a temporary sale on a high-value investment.
The Container Store Group
The Container Store Group, Inc. (NYSE: TCS) operates retail stores that offer storage and organization solutions, such as closet organization systems. The company is headquartered in Coppell, Texas, and was founded in 1978.
The company had modest revenue growth of 4% in 2015. Its operating cash flow of $45.2 million is strong. The company's debt of $364 million is rather high for its market capitalization, but its current ratio of 1.4 indicates an ability to pay current liabilities without difficulty.
The Container Store stock dropped by 75% in 2015. Depending on your interpretation of the company's fundamentals, you may view this as a portentous sign or as a cue to scoop up this stock while it is discounted.