Portfolio Update: 4 Small-Cap Rockets on the Launch Pad
Recent sharp declines among overvalued large-cap stocks highlight the wisdom of seeking small-caps, which are poised to outperform in 2018. Here’s a look at a quartet of small-cap stars in the Breakthrough Tech Profits portfolio.
The stock market correction in February underscores the danger of investing in large stocks that are overvalued based on unrealistic earnings assumptions. In what’s shaping up to be a tough year ahead, small-cap companies could bring both stability and growth to your portfolio, especially the value-oriented recommendations below.
Typically, small caps are considered riskier. However, bull runs often are propelled by a relatively small number of strong stocks that are “market leaders.” When these stocks begin to falter, it could mean that the rest of the troops will follow. We’ve seen this dynamic in recent weeks.
The correction probably isn’t over. Fears over a trade war flamed anew this week. President Trump signed tariffs on Thursday on steel and aluminum. Investors are spooked by the specter of protectionism.
Trump’s “America First” policies pose a threat to export-dependent giants, but they’d actually benefit U.S. small caps. The majority of these small caps derive the bulk of their sales domestically, which means that trade wars and a strong U.S. dollar tend to hurt them less.
Let’s take a look at four of our small-cap rockets:
- USA Technologies (NSDQ: USAT)
Market cap: $482 million. USAT allows vending machine owners to stop collecting, counting and depositing quarters and dollars. It sells, leases and rents credit and debit card processors linked to a proprietary, Internet-connected payments platform.
Mobile payments is an exploding business; USAT dominates its niche. As opposed to its large-cap peers, USAT enjoys enormous room for growth. How much growth?
The average analyst expectation is that USAT’s year-over-year earnings growth will come in at 200% in the next quarter, 400% for the current year, and 116% next year. My own calculations show that USAT should generate five-year growth of at least 25%, on an annualized basis.
USAT is a buy up to $14.00.
- 22nd Century Group (NYSE: XXII)
Market cap: $316.32 million. This small biotech company focuses on genetic engineering and plant breeding and is developing a new strain of hemp with zero THC, the main psychoactive compound found in cannabis.
Apart from medical uses, a THC-free plant would have huge ramifications for the industrial hemp industry, which is all but crippled here in the U.S. Hemp is one of the world’s most sustainable and practical basic materials yet has been illegal since 1970.
XXII also is creating genetically engineered tobacco plans with 97% less nicotine than conventional strains. The FDA has made low-nicotine cigarettes a priority.
The average analyst expectation is that XXII’s year-over-year earnings growth will reach 50% in the current quarter, 33.30% in the current year, and 30% next year.
XXII is a buy up to $7.00.
- Immersion (NSDQ: IMMR)
Market cap: $356.7 million. IMMR develops technologies that allow people to interact with various digital products by using their sense of touch.
Immersion remains the leading developer and licensor of touch feedback technology and it has announced partnerships that bode well for future quarters.
BTP portfolio holding Tencent Holdings (OTC: TCEHY) has licensed Immersion’s TouchSense technology to deliver next generation interactive experiences to its mobile applications. Additionally, Tencent also has licensed Immersion technology to incorporate haptics into its Super NBA game.
The average analyst expectation is that IMMR’s year-over-year earnings growth will come in at 550% in the current quarter, 102.70% next quarter, and 239.80% for the current year. My own calculations show that IMMR should generate five-year earnings growth of at least 15%, on an annualized basis.
IMMR is a buy up to $12.00.
- MicroVision (NSDQ: MVIS)
Market cap: $84.5 million. MicroVision’s hefty research and development expeditures will hold the company in good stead. I expect these investments in organic growth to bear fruit in 2018 and beyond.
MVIS develops scanning technology for high-resolution miniature projection, and three-dimensional (3D) sensing and image capture solutions.
The explosive growth in virtual reality/augmented reality (VR/AR) is a multiyear tailwind for MVIS.
The moneymaking opportunities of VR/AR are enormous. Goldman Sachs (NYSE: GS) estimates that the market for VR alone will reach $80 billion by 2025, with the potential for that figure to actually soar much higher to $180 billion.
I’m also heartened by MVIS’ growing footprint in the Internet of Things field, where the company’s interactive display engine meshes mobility display with 3D sensing.
Analyst earnings projections aren’t available for this very small stock, but my own numbers show that MVIS should generate five-year growth of at least 18%, on an annualized basis.
MVIS is a buy up to $3.75.
John Persinos is chief investment strategist of Breakthrough Tech Profits.
Stock Talk
Mark M
Hello John,
I know you have put your other tech holdings HIMAX, NVDA, etc. on hold due in part to the tech pull back per your MAR 30 report. You didn’t mention MVIS in that report, and now its hovering around $1.10 share recently. My question is, do we need to worry about it going under a buck and becoming a risk of being de-listed, or do you still see this moving north? I have a significant position since your recommendation and have rode it all the way down. I am considering adding more but would like to know your thoughts. Is MVIS on sale, do you feel this is going south of a dollar, or are you thinking of putting this on “hold” very soon like the other on your MAR 30 report? Sorry for all the questions, I just get nervous when sp is around a buck, I have never had a positive outcome. Thank you in advance for sharing your thoughts to help me make my decision.
John Persinos
Mark: It’s true, MVIS has taken a beating year to date, but so has the rest of the tech sector. I’m not ready to give up on the stock just yet. Indeed, shares of MVIS spiked 5.80% today.
The entire tech sector, especially small caps, have gotten clobbered by uncertainty spawned by trade war fears and the Facebook data privacy scandal. What’s more, the FAANG stocks that have led the bull market had been due for a correction; they’re still overvalued and could fall further before they bottom out. All five FAANG stocks rose today, but the turbulence isn’t over.
Facebook CEO Mark Zuckerberg is scheduled to appear before the U.S. Senate for two days, April 10-11. He’s likely to get flayed alive by lawmakers, which in turn could roil tech stocks even more. The business model of not just Facebook but other tech giants, such as Alphabet’s (NSDQ: GOOGL) Google, could be threatened by tougher regulation. Alphabet of course is a BTP holding. Welcome to “headline risk.”
MVIS shares currently trade at $1.10; the average analyst one-year price target is $3.67. The consensus among analysts is that MVIS should rack up five-year earnings growth of at least 18%, on an annualized basis.
As with the other small-cap tech firms in our portfolio that I recently put on hold, I’ll be keeping a very close eye on the next round of earnings reports for MVIS. If operating results disappoint for MVIS and some of our more vulnerable “holds,” I’ll need to cut loose the under-performers.
I’ll have more to say about MVIS in my weekly portfolio update, which is due tomorrow (Friday). Thanks for your question. I value engaged readers and I’m here to help you make money.
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Mark M
Hi John,
I received a letter from my broker regarding XXII.
In part it states:
We’re writing to offer you a unique income opportunity through our Securities Lending Fully Paid (SLFP) program. Enroll in SLFP, and you can receive monthly income for lending securities to us that are in high demand by other investors.
Benefits of the SLFP program include:
• You can sell loaned securities at any time.
• You can end loans at any time.
• Income accrues daily and is paid monthly.
• You’ll receive 100% collateral for loaned securities.
• You can participate at no cost to you.
John, why would a broker offer this? I assume there is a “catch”? I have never heard of this and don’t understand why a broker would do this instead of just buying the stock outright? Why would it be better to “loan” my stock of XXII instead of someone just buying it? I realize you cannot offer me any advice and maybe unable to respond, but I thought I would ask. Thank you in advance for anything that you can share.
John Persinos
Mark: Securities law prevents me from providing you with customized, individual advice. You need to speak directly with your broker about this. Ask direct questions; expect direct answers. Never get involved with investments or investing methodologies that you don’t fully understand.
I can tell you this, generally speaking: Securities Lending Fully Paid (SLFP) programs are designed to give retail brokers an entrée into the lucrative securities-lending business. This sort of service tends to target wealthier customers who own a substantial amount of shares in companies that are in demand among short sellers.
Thanks for your question. I value reader feedback and I’m here to help.
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