OSUR - March Madness: My Final 4 Small Cap Stocks Under $10

2023-03-13 06:00:00 ET

Summary

• March Madness is here, and the markets are offering buy opportunities for investors wanting to take a calculated risk and take advantage of market corrections.
• Unlike both SVB Financial and First Republic which had Quant Sell ratings, the small-cap stocks recommended in this article possess solid investment fundamentals and excellent growth track records.
• Small cap companies – like underdog basketball teams – come with greater risk, but they sometimes have the potential for more upside.
• The NCAA Selection Committee rates teams based on game results, quality of opponents, scoring margin, and net offensive and defensive efficiency, similar to how our Quant Rating System ranks stocks.
• The small-cap stocks featured here based on our Quant Rating system come with risks but are rated Strong Buys, offer sound profitability, have outperformed the sector and market this year, and may help diversify your portfolio – for the win!

Selection Sunday 2023: Small-Cap Stocks

Selection Sunday is when the top 68 college basketball teams are selected to participate in the NCAA Division I men’s basketball tournament. Like the stock market, there are many options, but you want to pick the best according to rankings. The NCAA Selection Committee rates teams based on game results, quality of opponents, scoring margin, and net offensive and defensive efficiency. This similar methodology is how my quant ratings are used to select stocks for a portfolio and is precisely how I chose the four small-cap stocks for this article. Quantitative investing is a data-driven process. One of its best qualities is the ability to take human emotion out of the game and focus on mathematical and statistical models to make investment decisions. These models are designed to be systematic and objective, removing bias and emotional decision-making from the investment process, to discover great opportunities.

Investing in 4 Small-Cap Stocks With Strong Fundamentals

Small-cap stocks are smaller-sized companies that offer a great opportunity for long-term growth, yet come with increased risks. This is an exciting market to assess small-cap opportunities as the share prices could come down amid the market turmoil. With market values between $300M and $2B, small caps are considered riskier than large-cap stocks because of their size, and they tend to go through high growth periods when interest rates are lower, and the market is in a ‘Risk On’ mode. ‘Risk Off’ periods of higher leverage, and rising interest rate environments can be a scenario for a market sell-off. 18th-century financier Baron Rothschild coined the saying, "the time to buy is when there's blood in the streets.” The market conditions are ripe with uncertainty and a stock market pullback following last week’s market selloff amid the Silicon Valley Bank collapse, resulting in a domino effect of regional banks including First Republic Bank, and the KBW Index declining 6%. Now is a perfect period to assess small-cap stocks that are proven winners with sound fundamentals. I’ve selected four small-cap stocks with solid valuation, strong growth, EPS revisions, profitability, and momentum.

Similar to selecting a double-digit seed in the basketball tournament, in hopes of it beating the top-ranking teams, I’ve selected small-cap stocks by focusing on their strong buy ratings and fundamentals in hopes of a winning portfolio. Let us dive into my picks.

1. OraSure Technologies ( OSUR )

• Market Capitalization: $446.79M

• Quant Rating: Strong Buy

• Quant Sector Ranking (as of 3/11): 8 out of 1177

• Quant Industry Ranking (as of 3/11): 1 out of 36

Delivering innovative solutions and services, OraSure Technologies Inc., together with its subsidiaries, provides point-of-care, sampling tools, and diagnostics to promote health and wellness. Best known for its diagnostics and testing, OraSure was one of the first-to-market with rapid diagnostics for COVID-19, HIV, Hepatitis C, Ebola, and a range of other infectious diseases that has allowed the company to gain momentum across its business lines while trading at a discount.

OraSure Technologies Stock Valuation & Momentum

If you’re not first, you’re last, and OraSure ensures they capitalize on opportunities to accelerate growth through innovation, strategic partnerships, and the prospect of acquisitions. As evidenced in the year-to-date momentum, OSUR is on an uptrend, +35% YTD, allowing some Wall Street analysts to call the stock overbought. The SA Quant grade for P/E GAAP ((FWD)) is C+ with a multiple of 25.49x vs. the sector at 26.02. In my opinion, this would be a valuation that is in line with the sector. YTD, investors are actively purchasing shares to drive the price higher, yet the stock continues to come at a relative discount.

With an overall C valuation grade, a look at OSUR’s underlying valuation metrics showcases EV/Sales ratios and Price/Sales ratios with more than a 70% difference to the sector. While the forward P/E ratio of 23.49x is slightly higher than the median of 19.32x, this company is attractively priced on most of its valuation metrics, offering room for growth.

OSUR Stock Growth & Profitability

Offering strong profitability and tremendous growth on the back of tremendous fourth-quarter earnings beats, OSUR’s year-over-year EBITDA Growth as you can see below surged to 102,833% compared to the sector median of 2.88%. Achieving record top-line revenue of $123.08M, representing a 94% Y/Y increase, OSUR also delivered a Q4 EPS of $0.21 that beat by $0.20.

Working to bring down costs and better position the company, OSUR announced layoffs that included a reduction of 11% of its nonproduction workforce. The announcement resulted in an after-hours jump in trading of 15%. President & CEO Carrie Manner said ,

“In 2023, we are focused on elevating growth across our core portfolio, increasing the reach of our current products, expanding segments, and further enhancing our enterprise capabilities to drive business efficiency and growth. As an early proof point in our strategy, we signed a deal with Quest Diagnostics to serve as the preferred provider of saliva collection kits for Quest's Genomic Sequencing Services Group test offerings.”

The partnership with Quest Diagnostics is one of many drivers helping generate positive cash flow and business profitability. In addition to streamlining the company’s organization to enhance efficiencies and collaboration, OraSure maintains robust growth even without COVID-19 testing and diagnostics factored into the mix. Quant-rated a strong buy and trading just under $7 per share, consider this stock for a portfolio, along with my next pick.

2. Immersion Corporation ( IMMR )

• Market Capitalization: $247.22M

• Quant Rating: Strong Buy

• Quant Sector Ranking (as of 3/11): 20 out of 665

• Quant Industry Ranking (as of 3/11): 3 out of 30

Another company focused on delivering innovative solutions and services is a small-scale IT company called Immersion Corporation, which is focused on users’ digital experiences. Offering immersive and sensory-appealing technology, IMMR’s haptic technology offers users the feeling of immersion, which includes touch and tactile feedback through virtual and computer simulation. Through game controllers, phones, VR headsets, and other devices, Immersion Corporation enables life-like digital experiences proving lucrative while still trading at a discount.

Immersion Corporation Stock Valuation & Momentum

IMMR is trading well above its 10-day and 200-day moving averages on a longer-term uptrend. Despite the number of tech companies that have fallen post-pandemic (especially those on a smaller scale), IMMR has managed to rally. Trading just under $8 per share and near its 52-week high of $8.20, Immersion is +53% over the last year, significantly outperforming its median sector peers on a six-, nine-, and twelve-month price performance.

Although the stock trades near its one-year high, the company still offers an attractive discount. As showcased by its valuation grade below, IMMR’s forward P/E of 12.32x versus the sector median of 24.26x is nearly a 50% discount.

Its trailing PEG is an A+, a more than 91% difference to the sector. Accused of being a “patent troll,” Immersion Corporation has a track record of winning lawsuits against industry giants like Sony ( SONY ) and Apple ( AAPL ) for patent infringement, with the latest filing against Meta Platforms ( META ). If won, META may have to pay $34M to $60M to IMMR. Although Immersion’s business model is heavily reliant on its patent portfolio to generate revenue and earnings, adding to its portfolio with

IMMR Stock Growth & Profitability

Beating both top and bottom line results for the fourth quarter of 2022, analysts revised their estimates up. IMMR’s A+ profitability grade highlights strong profitability, supported by total revenues of $9.2M, which beat by $936,000, and an EPS of $0.45, which beat by $0.31.

With solid cash from operations and a focus on improving their cash position and cash equivalents, and short-term investments, Immersion approved a new stock repurchase plan in 2023, declaring a $0.10 special dividend.

“We are focused on protecting our intellectual property through the execution of new license agreements, the renewal of existing agreements, and by proactive enforcement. We also continue to pursue thoughtful capital allocation to increase long-term shareholder value, including, but not limited to, our $50 million stock repurchase program. Today, we are pleased to declare our second consecutive quarterly dividend of $0.03 cents per share,” said Immersion Chairman & CEO Eric Singer.

Consider this small-cap stock for your portfolio, along with my next pick.

3. Payoneer Global Inc. ( PAYO )

• Market Capitalization: $2.19B

• Quant Rating: Strong Buy

• Quant Sector Ranking (as of 3/11): 27 out of 665

• Quant Industry Ranking (as of 3/11): 3 out of 67

Headquartered in New York, NY, Payoneer Global Inc. is a payment platform that delivers a suite of services, including B2B accounts payable and receivables, international payments, and cross-border payment solutions. No doubt, this stock will take a hit and trade down in sympathy of the SVB Financial crisis. Trading at a relative discount, PAYO’s undervaluation is highlighted by a forward EV/Sales ratio of 2.08x, a -22.55% discount to the sector. In addition to its valuation, Payoneer, with the exception of the last 5-days, has bullish momentum. Outperforming its sector peers on a quarterly basis, PAYO has been on an uptrend over the last year.

Trading +40% over the last year and +14% YTD is capitalizing on the secular growth trends and digitization as nations and businesses strategically partner with one another for accelerated cross-border commerce, which has resulted in substantial growth for PAYO.

PAYO Stock Growth & Profitability

Following PAYO’s fourth-quarter results that included an EPS of -$0.03 that beat by $0.02 and revenue of $183.56M that beat by $12.67M, a year-over-year increase of nearly 32%, Payoneer stock soared nearly 17% on the results. With expectations of robust growth in FY23, six analysts revised estimates up over the last 90 days with zero downward revisions. As highlighted by Seeking Alpha contributor Value Quest

“Currently, the company's primary revenue source is China, contributing 34% of the total revenue . Compared to China, the U.S. is the second largest contributor as the company generates 12% of the total sales , and all other countries combined generate 54% of the total revenue .”

While the geopolitical environment may pose risks, particularly with most of its revenue coming from China, PAYO expects to top revenue estimates in 2023 through customer acquisition and targeting higher take-rate regions. Additionally, PAYO is projecting $120-$130M in EBITDA, more than double its year-over-year.

With plans to continue increasing its geographic footprint in diverse regions and invest ~$30M in 2023 to advance its technology platform, PAYO is optimistic about its long-term growth for working capital and checkout business. The company announced partnerships with Shopify, Shoplazza, and WooComerce, and has capitalized on the recovery in travel. As economies advance from the slowdown and flourish, Payoneer hopes to capitalize on and maintain its uptrend.

4. RPC, Inc. ( RES )

• Market Capitalization: $1.81B

• Quant Rating: Strong Buy

• Quant Sector Ranking (as of 3/11): 18 out of 246

• Quant Industry Ranking (as of 3/11): 5 out of 46

Through its subsidiaries, energy company RPC, Inc. offers a range of specialized services and equipment for oil and gas companies. Relatively discounted, RPC has a C- Valuation grade, highlighted by a forward P/E ratio of 5.49x, that’s a -32.98% discount to the sector, and a trailing PEG ratio of nearly a -95% discount to its peers.

On a longer-term uptrend, RPC delivers bullish momentum and has outperformed its peers on its three-, six-, and nine-month price performance. Although RPC’s one-year price performance is -27%, RPC continues to deliver tremendous growth and profitability, highlighted by consecutive earnings beats.

RPC Stock Growth & Profitability

Delivering excellent Q4 earnings results, RPC stock surged 11.8% after its announcement and doubled its quarterly dividend . RPC’s EPS of $0.41 beat by $0.12, and revenue of $482.03M beat by nearly 80% year-over-year. President and CEO Ben Palmer said ,

"Most of our service lines realized higher revenues during the fourth quarter due to strong activity and pricing improvements," as the company expects "continued robust drilling and completion activities based on indications from most customers."

RPC’s performance has resulted in three FY1 Upward analyst revisions and zero downward revisions over the last 90 days.

As reported by Seeking Alpha News , U.S. domestic rig counts during Q4 2022 experienced a 2% increase from Q3 as well as an 11% increase in the average price of oil for the same period. The average price of natural gas during Q4 also experienced a 17.3% increase compared to Q3. While the geopolitical risks surrounding energy, particularly crude oil and the recent caps on Russian oil pose risks, RPC offers a stock that is undervalued with tremendous growth, allowing it to outrank and outperform many of its competitors. Like my other stock picks that outrank many of their peers, consider my “underdog” small-cap stocks this March as we watch the ranks battle it out.

Strategy Amid the March Madness

The right mix of small-cap stocks in a portfolio resembles picking double-digit ranked teams for a March Madness bracket. Although there’s more risk, with the right fundamentals, small-cap stocks offer diversification and the potential for upside, similar to less favored teams during March Madness. Where blue chip stocks and blue blood teams tend to be favorites, consider alternatives with great fundamentals. From a discount perspective, small caps come at a great value and offer more upside potential, as we’ve seen over the last few years relative to large caps or, in the case of the NCAA – the occasional upsets by higher-ranking teams.

OSUR, IMMR, PAYO, and RES, were selected using Seeking Alpha’s Quant System by identifying stocks with market caps under $2B and with strong collective fundamentals . The stocks featured here may help diversify your portfolio while positioning you to capitalize on the potential upside. There are dozens of Top Stocks Under $10 rated Strong Buys as potential investments. Consider using investment research tools and screens to help ensure you’re furnished with the best resources to make informed investment decisions.

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