Small-cap stocks can be some of the most lucrative investments, if you know where to look. The key is finding quality companies early in their growth cycle before the major gains have already occurred. Many investors chase “meme” stocks for massive returns, but these often suffer from extreme dilution, leaving investors with more risk than reward. A wiser approach is targeting small caps with strong fundamentals – those nearing or achieving profitability with accelerating growth. While patience is required, the risk-reward outlook of this strategy is exponentially better.
As the Federal Reserve pivots from rate hikes to cuts in the coming months, the funding environment for startups will greatly improve. This emerging tailwind will provide smaller companies with access to growth capital, setting the stage for big gains ahead. I believe now is an opportune time to identify the highest quality names poised to benefit.
SurgePays (SURG)
SurgePays (NASDAQ:SURG) is one of the most under-the-radar stocks on the market. This stock trades at a forward price-to-earnings ratio of just 5-times, with steady revenue and earnings growth. Typically, stocks that trade this low are laden with debt. However, SurgePays carries a modest debt of $5.5 million compared to its cash position of $12.7 million. So, what explains the exceedingly low valuation? In my view, it is a combination of broad-based investor fear regarding the fintech sector, and a lack of awareness of SurgePays itself.
January brought about a surge of hesitation, when SurgePays announced a $15 million equity offering. This offering led to a 7% single-day drop. However, this capital raise was intended to fund the acquisition of Clearline Mobile – a smart strategic play that should merit reward, not punishment. The deal presents SurgePays the opportunity to expand its financial services offerings via Clearline’s 250,000 mobile subscribers.
As a profitable fintech with sound financials, SurgePays is poised to benefit in a big way once sector-wide jitters subside. The fintech sector has continued to lag despite strength across broader financial markets, but tailwinds are ahead. With rate cuts on the horizon, banks will likely accelerate fintech partnerships. This rising tide should disproportionately lift SURG stock, thanks to its rock-bottom valuation and now even greater scale.
Luminar Technologies (LAZR)
Luminar Technologies (NASDAQ:LAZR) is a higher-risk, high-reward opportunity as a leading lidar supplier to automakers. Lidar is widely viewed as the most advanced sensor technology for vehicle autonomy and safety. However, the current cost of lidar remains prohibitively expensive for mass adoption. This near-term reality has weighed on LAZR stock. Shares trade at just 0.2-times 2030 revenue projections of $4.6 billion – a multiple that assigns zero credit to anticipated hyper growth in the company’s core segments.
However, the long-term case remains compelling for Luminar. Costs are rapidly declining, evidenced by Luminar’s triple-digit order growth. Additionally, demand is clearly strong. Moreover, the company’s total addressable market extends far beyond electric vehicles to areas like industrial automation and robotics, boasting an immense runway for growth.
As lidar technology continues maturing and costs decrease further, I think this technology will be incorporated into consumer vehicles at a much more rapid rate. Luminar will likely reach profitability in 2027. That’s later than ideal, but reasonable for a company growing this swiftly.
Hut 8 Mining (HUT)
Hut 8 Mining (NASDAQ:HUT) is a cryptocurrency mining company uniquely positioned to capitalize on Bitcoin’s (BTC-USD) resurgence in 2023/2024. Bitcoin has rallied to more than $63,000 per token this month. Indeed, the tailwinds supporting this recovery are substantial, ranging from institutional adoption via Bitcoin ETFs to the upcoming block reward halving in early 2024.
Hut 8 offers direct exposure to future Bitcoin price appreciation. Even more impactful will be its elevated mining production in the years ahead. Hut 8 is aggressively expanding capacity, evidenced by a new $17.3 million mining site expected to cut $18.5 million in up-front mining costs.
The new facility will enable industry-leading cost efficiencies. Per the company’s CEO, Hut 8’s all-in cost to design and build the Culberson County site is expected to be less than $275,000 per MW. This represents a savings of more than 40%.
These smart capital investments position Hut 8 to generate explosive growth as crypto tailwinds accelerate. Once financial results reflect the full benefit of higher Bitcoin prices and the company’s expanded hashrate, HUT stock could rapidly re-rate higher.
On the date of publication, Omor Ibne Ehsan did not hold (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.