Stocks of listed companies which have market capitalization in the range of $300 million to $2 billion are considered to be small cap stocks. However, since the stock price of such companies is prone to big fluctuations over a short period of time, many companies with market cap up to $10 billion can also be found in the small cap universe. Such companies may or may not have any marketable product(s) or service(s), may be involved only in research-based projects, may not make any profits, and may not pay any dividends. While such small cap stocks are considered riskier than large caps or even mid caps, they come with the potential of making greater profits for investors. Stock of a 10-member biotech company researching on a path-breaking cancer cure may emerge as a multi-bagger if the venture succeeds, or a small team of computer professionals working on an artificial intelligence (AI)-powered robotics technology may secure a long-term patent resulting in windfall gains leading to a massive bull run in its stock price.
Owing to the small-sized classification, a very large number of companies belonging to all industrial sectors form the small cap universe. Many leading small cap market indexes exist which represent the overall performance of the small cap sector. Popular small cap indexes include the Russell 2000 index, the MSCI USA Small Cap Index, or the S&P Small Cap 600 Index, each of which contains a long list of companies.
Based on the annual returns generated by leading small cap companies during 2018, this article presents a selected list of the top winners from the small cap universe. The list includes companies which have generated annual returns in excess of 100 percent, have a market cap of at least $2 billion and are part of the Russell 2000 index as of writing. Based on the percentage gains realized between January 2, 2018 and December 31, 2018, the performance of the individual stock is compared with that of the Russell 2000 index which declined by around 12.5 percent during 2018.
List of Top 5 Small Cap Companies
1. The Trade Desk, Inc. (TTD)
- Market Cap: $6.38 billion
- Performance: 150.08% annual return
2. World Wrestling Entertainment, Inc. (WWE)
- Market Cap: $6.22 billion
- Performance: 136.20% annual return
3. Etsy Inc (ETSY)
- Market Cap: $6.33 billion
- Performance: 125.64% annual return
4. Alteryx Inc (AYX)
- Market Cap: $4.19 billion
- Performance: 123.61% annual return
5. Amedisys Inc. (AMED)
- Market Cap: $4.31 billion
- Performance: 113.39% annual return
The Trade Desk
Ventura, California-based Trade Desk is a global technology company. It provides a cloud-based self-service platform that enables its clients to buy and manage digital advertising campaigns across various advertising formats. Catering to the needs of brand and media professionals and enterprises, it offers advertising services across display, video and social platforms, and on a range of devices which include computers, mobile devices and connected smart televisions.
While the stock price did not move much during the first few months of the year, the company's investments in an ad platform for connected TV started showing results mid-year onward. The ten-fold growth realized in connected TV stream, three-fold revenue increase in audio ads, and around 66 percent increase mobile ads became the major drivers of the rally which followed during the third quarter of the year. Strong second and third quarter numbers that convincingly surpassed street expectations supported the stock price move.
Though there are concerns about threats of competition in the connected TV space and expensive stock valuations, the partial decline observed in December has made the stock attractive. Company’s omni-channel revenue streams, global expansion plans, stable record of high customer retention of 95 percent over last several quarters, and its latest products and innovative offerings are expected to drive the company’s business in 2019.
World Wrestling Entertainment
Most popularly known for its wrestling events, the Stamford, Connecticut-based World Wrestling Entertainment was established in 1987 and operates as an integrated media and entertainment company. Its business includes multi-channel based content production and distribution, television rights agreements, pay-per-view event schedules, live events and films, licensing and sale of various WWE-themed products and brands.
After a moderate first quarter, the stock price shot up in May based on the news that the company is opening the sale of its “Smackdown” franchise to various networks. The new deal would enable WWE charge a hefty premium a premium for its content after NBCUniversal’s refusal to renew the deal. The stock hit all-time high in July following the announcement of several new TV deals, including “Raw” that continued on Comcast while “SmackDown” went to Fox Sports. The third-quarter earnings reported in October saw the company missing consensus estimates leading to partial loss of YTD gains. Amid concerns of competition from Amazon Prime and other on-demand TV offerings, 2018 will go in the history as the best year for WWE in terms of the company managing to lock-in highly lucrative television deals for the next five years.
New York-based Etsy operates as an open-ended offline and online marketplace which facilitates connecting people from around the globe to make, buy and sell goods through online and offline channels.
Share price posted big YTD gains exceeding 100 percent based on the strong quarterly report in February, high growth recorded for user-engagement, and the launch of company's new user toolkit in June. The planned investment and growth initiatives around improving engagement metrics, global expansion plans, and new monetization initiatives introduced in June also supported the upward momentum. September and November saw the share price touching two new all-time highs following solid financial report card for the quarter. The implementation of a new pricing structure and on-track progress made on migrating to Google Cloud are expected to drive the future business of the company.
The Irvin, California-based Alteryx was incorporated in 2011 and operates as a self-service data analytics software provider. It helps organizations take data-driven decisions by sourcing, preparing, consolidating and analyzing data from several relevant sources through its secure and scalable subscription-based platform.
The big boost came in during May and then in August when the company announced better-than-expected first and second quarter results. The results were backed by a significant improvement in customer count which rose by 40 percent during the second quarter. Though the company is yet to become profitable, it has repeatedly improved its revenue outlook each quarter which supported the momentum. The company expects revenue to improve by another 48 percent in the fourth quarter of fiscal 2018, and investors will eagerly await the results announcement due this month.
Founded in 1994, Amedisys is a healthcare sector company which provides home health, hospice and personal care services. It owns and operates several Medicare-certified home healthcare centers, Medicare-certified hospice care centers and personal-care care centers across 35 U.S. states.
Amedisys stock price has had a consistent upward run throughout the first nine months of 2018. The stock gain momentum following better-than-expected quarterly results announced in May and August for the first and second quarters. Its timely acquisitions of East Tennessee Personal Care Service (ETPCS), a personal care provider headquartered in Knoxville, Tennessee, and of Bring Care Home, a personal care provider in northeastern Massachusetts, in May and July, respectively, helped it expand its footprint in personal care segment. The company also improved on its “clinical quality,” as indicated by STARs score preview by CMS.
The aging demographics of American population and the need for improved care in a home nursing environment are expected to favor the company’s business. However, such home healthcare providers have dependency on Medicare for their revenue, and any changes to the payment proposals issued by the authorities can severely impact the stock price.
Price Performance of Small Cap Stocks
Graph Courtesy: Yahoo! Finance
Small Cap Sector Wrap-up
The small cap category includes companies which are small in terms of market value, are usually in the growth stage and are prone to wide swings in their stock price. While the above mentioned stocks have generated positive returns in excess of 100 percent, a large number of other small cap stocks have ended deep in the red. Small caps are a riskier bet when compared to large caps or mid caps, and investors should act with caution while investing in such stocks.