3 Overlooked Small Caps for a Fast-Growth Portfolio

As the investment landscape for large-cap stocks begins to look overcrowded, a number of big investors are turning to small-cap stocks to bolster their portfolio’s performance. Small caps have outperformed the broader market this year, and one of the leaders in that space is the Alger Small Cap Focus Fund. Under the management of Amy Zhang, the fund has gained as much as 47% since the start of the year to last Wednesday and was ranked second among all U.S. portfolios in Morningstar’s coverage ratio. Telling Business Insider that that the small-cap space is “a fertile ground for active management,” Zhang is currently eyeing stocks that can turn data into actionable information. Three of her favorites include Veeva Systems Inc. (VEEV), Cognex Corp. (CGNX) and Apptio Inc. (APTI).

3 Small Caps That May Pay Off

Veeva

This tech company is primarily focused on the healthcare industry, providing pharmaceutical and biotech companies with access to its cloud-based software. That software allows those companies to securely scan documents from mobile phones or track data throughout the duration of a clinical trial. Some of the company’s big clients include Merck and Biogen.

With $512 million in cash and earned revenue of $209.6 million at the end of the second quarter, the company also dabbles in the consumer-goods and chemical industries, and Zhang believes “there’s still lots of room for growth,” according to Business Insider’s story published on 16 September, 2018. Veeva’s shares are up nearly 87% on the year. (To read more, see: 3 Under the Radar Stocks to Ride AI’s Growth.)

Cognex

Another tech company, Cognex provides machine-vision products that can perform tasks previously done by humans. Such tasks vary from reading barcodes to assisting laser cutters to verifying that pizzas are sufficiently covered with cheese.

Like Veeva, Zhang believes the company has a lot of long-term potential, and Cognex’s substantial research and development (R&D) spending is a testament to its ambitions to fulfill that potential. During the second quarter, the company spent $27 million on R&D, equivalent to 13% of its revenue, while boasting $755 million in cash and investments and no debt. The company’s stock is down about 7% year to date (YTD).

Apptio

Among one of Zhang’s top-ten holdings, Apptio is a cloud-based business offering management solutions. It specializes in taking corporate clients’ IT data and combining it with details of their finances in order to devise a budget and plan their technology needs. Typically focused on corporate clients, the company has started to attract government clients as well.

Apptio finished the second quarter with $255 million in cash and $143 million in net debt, making it another holding in Zhang’s portfolio with a positive net cash position. The company’s shares are up more than 66% since the start of the year.

What’s Fueling the Small Caps

One of the big reasons why small caps are performing so well this year, as indicated by the Russell 2000’s 2% lead over the S&P 500 so far, is that investors have been worried over the trade war disputes causing them to invest a greater share in domestically focused companies. Such companies tend to be smaller compared to the big multinationals, and are also receiving proportionately higher benefits from the corporate tax cut. “Investors view small- or mid-cap names with more U.S. exposure as a safe place where they wouldn’t have to deal with the trade war,” chief global market strategist for Invesco Kristina Hooper told the Wall Street Journal. (To read more, see: Stay in Small Caps Even If Trade Woes Ease: Stifel.)