Small-cap stocks, which have a market cap of $300 million to $2 billion, have more potential to generate multibagger returns than their bigger peers. However, small-cap companies are also riskier investments because they're usually younger companies that haven't stood the test of time yet.
Today, a trio of our Motley Fool contributors will highlight three small-cap stocks that offer an attractive balance of risk and reward: Bitauto (BITA +0.00%), Retail Opportunity Investments (ROIC +0.00%), and Boston Omaha (BOMN +1.15%).
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An underdog play on China's auto industry
Leo Sun (Bitauto): Bitauto provides internet content, marketing services, and transaction services for China's automotive industry. It generates revenue from advertising and subscription services on its website and cloud platform, transaction services between customers and auto dealers through its subsidiary Yixin, and digital marketing solutions for auto companies.
Bitauto's stock lost 40% of its value this year on concerns about sluggish sales of cars in China, trade tensions, the departure of its chief technology officer, competition from its larger rival Autohome (ATHM 1.38%), and its lack of GAAP profits. However, that sell-off reduced Bitauto's forward P/E to 7, compared to Autohome's forward P/E of 21.
Bitauto's valuation is very low relative to its growth potential. Its revenue rose 31% to 10.58 billion RMB ($1.54 billion) in 2018. It expects its revenue to rise 14% to 16% annually during the first quarter, and analysts expect its revenue to rise 12% this year and 16% next year.
Bitauto's non-GAAP net income rose 30% to 934.7 million RMB ($135.9 million), while its GAAP loss narrowed from 1.43 billion RMB ($207.5 million) to 679.3 million RMB ($98.8 million). Those bottom-line improvements indicate that it doesn't need to burn cash to keep pace with Autohome. Bitauto didn't offer any bottom-line guidance, but analysts expect its non-GAAP earnings to grow 20% this year and 28% next year.
Bitauto's dependence on the Chinese auto market made it an unattractive investment over the past year. However, it remains a lucrative takeover target for Autohome, its stock is cheap, and its prospects could brighten if trade tensions fade and auto sales accelerate again.
Slow and steady, with a dividend focus
Reuben Gregg Brewer (Retail Opportunity Investments): Buying a real estate investment trust (REIT) that owns retail properties takes a strong stomach today. That's doubly true when the REIT's market cap is a tiny $2 billion or so (squeaking in at the top end of what's generally considered small cap). However, ROIC, as it's commonly referred to, has been doing a pretty good job of expanding its business despite the so-called retail apocalypse.
Over the last five years, it has grown its real estate assets from $1.4 billion to $3.2 billion, increasing revenues from $111 million in 2013 to $296 million in 2018. The dividend has increased each year for a decade at this point, and the stock offers a pleasing 4.5% yield. Occupancy, meanwhile, has remained in the high 90% range at its primarily grocery-anchored West Coast strip-mall portfolio despite the headwinds facing the retail sector.
ROIC Dividend Per Share (Quarterly) data by YCharts.
Although it may take some time for Retail Opportunity Investments to scale up, that's pretty much the point. Income seekers can collect a generous and well-covered dividend (the funds from operations payout ratio was a modest 68% in 2018) while it continues to grow. And it has the entire country to expand to beyond its core market, an area that, frankly, still offers plenty of room for expansion in its own right. Even better, it has been able to steadily increase rents on expiring leases, offering an avenue for growth that doesn't even require acquisitions. If you are interested in a slow and steady dividend payer that's expanding its business, this small-cap REIT should be on your watch list.
This mini-conglomerate could easily be a huge one
Steve Symington (Boston Omaha): With revenue of just $20 million last year and a market capitalization of roughly $550 million as of this writing, Boston Omaha is firmly in small-cap territory today. But this billboard and surety insurance specialist has big plans for the future and an operating model that should back up its ability to fulfill them.
For perspective, the company started to gain attention in late 2017 after a report from The Wall Street Journal highlighted that not only does it use a capital-allocation strategy similar to the one Warren Buffett employed to build Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) into the diversified insurance and financial holding giant we know and love today, but one of Boston Omaha's co-CEOs, Alex Buffett Rozek, also happens to be the famous investor's grandnephew.
Of course, the familial connection is of little consequence to Boston Omaha's core businesses, as Warren Buffett is not involved in its day-to-day operations. But Buffett did muse that he "think[s] the world of" Rozek, adding that his younger relative has a "very good mind [and] certainly has good values."
But more important right now is that Boston Omaha just capped a transformative year in which it acquired a massive number of billboards for its Link Media subsidiary -- billboard rental revenue soared 167% in 2018, despite the bulk of its acquisitions being completed between late July and August -- and expanded the ability of its General Indemnity Group (GIG) subsidiary to write surety insurance in all 50 states and the District of Columbia.
Boston Omaha has also acquired stakes in several other businesses, including a commercial real estate company, a home builder, and a regional bank. And we can be sure these astute capital allocators are keeping their eyes peeled for other intriguing opportunities to expand the company's reach.
For investors willing to buy now and watch Boston Omaha's story unfold in the coming years, I think the stock could deliver life-changing gains.
