As the market continues to absorb concerns like high inflation, rising interest rates, and a possible recession, the stock market is still far from getting back into bull market mode. With this, you may think it’s not the right time to consider micro-cap stocks to buy and hold.
After all, as riskier, more volatile investments, micro-cap stocks, or stocks with market capitalizations of $300 million or less, could make another move lower before making another move higher. Yet while the near-term could stay volatile, certain names in this category have a strong chance of delivering strong returns over a long timeframe.
For example, the seven stocks listed below. Selling at discounted valuations today, each of these micro-cap stocks to buy and hold for the next 10 years could gradually deliver solid returns as long-term catalysts play out. Consider buying them now, while prices remain depressed.
Micro-Cap Stocks to Buy and Hold: Alto Ingredients (ALTO)
Alto Ingredients (NASDAQ:ALTO) produces specialty alcohols, ethanol and essential ingredients. Due to the low-margin nature of its business, it makes sense that shares sport a low forward valuation.
ALTO stock trades for just 7.1x estimated 2023 earnings (63 cents per share). It will probably never sport the premium valuations seen with branded liquor companies. For instance, Brown-Forman (NYSE:BF-B), which trades for 37.8x earnings. Still, there may be the opportunity for it to grow its earnings multiple in the coming years.
Mainly, this opportunity will come from increased margins, via its purchase of Eagle Alcohol. Cost savings from consolidating Eagle into Alto will also produce cost savings that will fall straight to the bottom line. These two factors could, in time, push this stock back to the double-digit prices it traded for in late-2020. Buy it while it remains at penny stock levels (under $5 per share).
Build-A-Bear Workshop (BBW)
The pandemic recovery was a boon for Build-A-Bear Workshop (NYSE:BBW). The purveyor of plush animals made a big move out of the red last fiscal year (ending January 2022). Reporting losses of $1.54 per share in FY21, earnings per share in FY22 came in at $3.06.
That makes BBW stock, trading for around $14 per share today, seems like a bargain. Yes, there’s a reason why shares are trading at such a discount. If a recession plays out, revenue could drop. With its high fixed costs, earnings could evaporate as well.
Or will they? Per one Seeking Alpha commentator, annual EPS over the next few years could remain in the $2.60-$2.89 range. If this pans out, even if Build-A-Bear’s forward multiple only moved up to 10x, it would be trading for between $26 and $28.90 per share.
Micro-Cap Stocks to Buy and Hold: Canterbury Park Holding (CPHC)
Canterbury Park Holding (NASDAQ:CPHC) is a stock I’ve held for several years. In fact, I bought it just months before the pandemic. At one point, this looked like bad timing. A global pandemic was the last thing a racetrack and casino operator, monetizing the real estate surrounding its sole property (located in Shakopee, Minnesota), needed to happen.
Fortunately, things didn’t just get back to normal in 2021; the company’s earnings saw a tremendous jump compared to pre-pandemic earnings. As a result, CPHC stock has made its way to the low-$20 range.
Yet while Canterbury may hold steady for now, it may have the ability to make a big move in the coming years. The company is still realizing the value of its excess real estate. It could also be a takeover target for a regional gaming company.
Chicken Soup for the Soul Entertainment (CSSE)
Right now, much of the attention surrounding Chicken Soup for the Soul Entertainment (NASDAQ:CSSE) has to do with its status as a short-squeeze stock. However, the main appeal should be with this company’s long-term potential to become a profitable entertainment company.
Chicken Soup’s main asset is video streaming platform Crackle. It also recently purchased Redbox. Cost savings realized from the Redbox deal (which could total $40 million per year) could enable the company, after years of reporting losses, to start generating consistent profits.
Improved results, not a much-discussed squeeze, may be what catapults CSSE stock, down 70% in the past year, back to past price levels. That’s not all. After successfully integrating Redbox, the company could pursue similar deals for smaller streaming operators, like Cinedigm (NASDAQ:CIDM).
Micro-Cap Stocks to Buy and Hold: Whole Earth Brands (FREE)
Whole Earth Brands (NASDAQ:FREE) is a producer and marketer of artificial sweeteners. Brands include Whole Earth, Pure Via, Equal, and Canderel. Despite being a maker of branded consumer packaged goods, this stock trades at a much lower valuation than comparable names.
Especially given the big jump in earnings expected in the coming year (from 48 cents to 74 cents per share). FREE stock right now trades for just 5.4x this year’s estimated earnings, and 7.4x estimated 2023 earnings. The company’s high debt position ($445.2 million) may be a reason for this. Also, the mature nature of its business. At best, revenue may only grow by single-digits going forward.
Nevertheless, if it can commit to using its cash flows to reduce this debt, and increase profitability, it could still deliver strong returns. Its highly leveraged nature could amplify the upside from minor increases in revenue and operating income.
Immersion (IMMR)
Immersion (NASDAQ:IMMR) calls itself a developer and licensor of haptic (3D touch) technology. It’s well known for suing larger tech companies for patent infringement. Most recently, it has filed suit against Meta Platforms (NASDAQ:META), over alleged infringement of its patents in the Facebook parent’s AR/VR devices.
That said, potential windfalls from patent lawsuits aren’t the main reason to buy IMMR stock. Instead, it’s the potential for steady revenue and earnings growth. The rise of AR/VR technology could boost demand for its patents.
This may enable the stock, trading for just 7.9x forward earnings today, to command a higher forward multiple in the future. Larger tech firms interested in its patent portfolio could end up buying the company outright. It’s fallen from over $15 per share in 2021, to around $6 per share today. Now may be an opportune time to buy it.
Micro-Cap Stocks to Buy and Hold: Townsquare Media (TSQ)
I previously have argued why Townsquare Media (NYSE:TSQ) is one of the best cheap stocks under $10 per share. Shares in this radio station operator are “cheap,” in the sense that they trade for a low stock price.
Currently, TSQ stock trades in the high single-digits. The stock is also cheap in terms of its valuation. It trades for just 4.8x forward earnings. Sure, that’s not out of the ordinary for the mature (and declining) radio business.
But Townsquare Media is more than just a radio broadcaster. It’s increasingly becoming more of a digital marketing company. Over the next decade, its non-radio segment stands to become a larger contributor to its bottom line. This could help the stock move to a higher valuation. Also, like some other radio companies, it owns a lot of the physical real estate in which it operates radio stations. These properties could be sold to reduce debt.
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Read More: Penny Stocks — How to Profit Without Getting Scammed
On the date of publication, Thomas Niel held a LONG position in CPHC. He did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.