A micro-cap stock has a market capitalization between $50 million to $1 billion. Micro-cap stocks have higher risks amid low liquidity and lack of assets. Most of these stocks are early growth-stage companies that are more vulnerable to problems arising both internally and externally. They tend to burn through cash quickly, losing to their counterparts due to financial instability. Despite this, most investors include these stocks in their portfolio as they offer the potential for higher rewards.
Investing in micro-cap stocks during an economic recession can offer unlimited growth potential with long-term sustainability as these companies often focus on long-term projects. For instance, from January 2008 to January 2018, the Dow Jones Select Micro-Cap Index returned an annualized 11.6% while the S&P 500 returned an annualized 10.37%. The Russel 2000 micro-cap stocks index has recovered more than 8% since the start of January 2021, which outperformed the large-cap focused S&P 500 1% gain.
Micro-cap stocks often get no attention from the Wall Street, but data shows that these stocks often outperform mid-cap and large-cap stocks. Professors Thomas Cook and Michael Rozeff of the University of Iowa analyzed thousands of stocks trading on the NYSE, the AMEX and several other exchanges from 1968 to 1978. They ranked 3,130 stocks on the basis of market capitalization and divided them into several portfolios. The four portfolios containing micro-cap stocks posted returns of 0.14 to 0.45 percent after adjustment for risk, beating large-cap portfolios that posted negative monthly alphas ranging from -0.01 percent to -0.35 percent.
Centre for Research in Security Prices analyzed stocks data for a period of 80 years, from 1926 to 2009. Their research shows micro-cap stocks returned 12.1%, better than low-cap, mid-cap and large-cap stocks. Large-cap stocks posted 9.8% during this period. The “value effect” always helps micro-cap stocks. Investors try to gauge stocks on metrics like size, price-to-book value and assets. But growth cannot be evaluated with these metrics. That’s why micro-cap stocks are often mispriced.
In order to identify the 15 best micro-Cap stocks to buy now we started with the top stocks in the 30 most popular micro-cap stocks from 1999 to 2016. We were able to narrow down our list to 15 stocks using the hedge fund sentiment data.
Our in-house research showed that by using the hedge fund sentiment data, we can identify a small group of stocks that can outperform the S&P 500 index on average by double digits annually. For instance, the portfolio for stock picks for our monthly newsletter has beaten the market by over 111 percentage points since March 2017. Some of the portfolio choices for our monthly newsletter were also publicly shared on our website. In October, we posted this real estate stock and since then it’s been up more than 60 percent. Between March 2017 and February 5th 2021 our monthly newsletter's stock picks returned 187.5%, vs. 75.8% for the SPY. Our stock picks outperformed the market by more than 111 percentage points.
Based on our hedge fund sentiment data, we present to you the 15 best micro-cap stocks to buy now. Please note that all market caps for the companies mentioned in the article are as of September 30, 2020.
15. Arch Coal, Inc. (NYSE:ARCH)
No of HFs: 26
Total Value of HF Holdings: $211 Million
We start the list of the 15 best micro-cap stocks to buy now with ARCH. At the end of September, a total of 26 hedge funds tracked by Insider Monkey were long this stock. An insider purchased 1,500 shares at around $46 in February 2021. The stock is up 4% since then.
14. Quotient Limited (NASDAQ:QTNT)
No of HFs: 26
Total Value of HF: $213 Million
At the end of September, a total of 26 hedge funds tracked by Insider Monkey were long this stock. Joseph Edelman’s Perceptive Advisors is one of the top hedge funds having positions in QTNT, which had $83 million invested in the stock at the end of September. An insider recently purchased 2,911,764 shares at around $4 in September 2020. The stock is up 25% since then. The company recently received a request from the Food and Drug Administration (FDA) for additional testing data regarding the 510 (k) application for the initial Serological Disease Screening Microarray (SDS) and MosaiQ instrument. QTNT will re-submit its application with additional data in early 2021 and expects to receive approval in mid-2021.
13. Iveric Bio, Inc. (NASDAQ:ISEE)
No of HFs: 26
Total Value of HF: $278 Million
One of the biggest hedge funds having positions in CNST is Kurt Von Emster’s VenBio Select Advisor which had $40 million invested in the stock at the end of September. An insider recently purchased 62,500 shares at around $4 in December 2019. The stock is up 25% since then.
12. Constellation Pharmaceuticals, Inc. (NASDAQ:CNST)
No of HFs: 26
Total Value of HF: $303 Million
At the end of September a total of 20 hedge funds tracked by Insider Monkey were long this stock. One of the biggest hedge funds having positions in CNST is Kurt Von Emster’s VenBio Select Advisor which had $86 million invested in the stock at the end of September. An insider recently purchased 5,539 shares at around $23 in March 2020. The stock is up 45% since then.
11. Forterra, Inc. (NASDAQ:FRTA)
No of HFs: 27
Total Value of HF: $128 Million
One of the biggest hedge funds having positions in FRTA is Jos Shaver’s Electron Capital Partners which had $55 million invested in the stock at the end of September. An insider recently purchased 23,585 shares at around $4 in March 2019. The stock is up 425% since then.
10. Sally Beauty Holdings, Inc. (NYSE:SBH)
No of HFs: 27
Total Value of HF: $134 Million
At the end of September, a total of 27 hedge funds tracked by Insider Monkey were long this stock. Cliff Asness’ AQR Capital Management is one of the top hedge funds having positions in the company, which had $37 million invested in the stock at the end of September. An insider recently purchased 10,000 shares at around $14 in February 2021. The stock is up 7% since then. Recently, Sally Beauty announced that they are launching PR initiatives for Black History Month. Aside from expanding their offerings for textured hair care, they will also reach out to consumers at home with textured hair educational content.
9. Fluidigm Corporation (NASDAQ:FLDM)
No of HFs: 27
Total Value of HF: $152 Million
The 9th best micro-cap stock to buy now is FLDM. Derek C. Schrier’s Indaba Capital Management is one of the top hedge funds having positions in the stock, which had $29 million invested at the end of September. An insider purchased 10,000 shares at around $2 in March 2020. The stock is up 150% since then. During the fourth quarter of 2020, Fluidigm reported that its revenue jumped 38% year over year to $44.6 million.
8. Abercrombie & Fitch Company (NYSE:ANF)
No of HFs: 27
Total Value of HF: $239 Million
One of the biggest hedge funds having stakes in the company is David Paradice’s Paradice Investment Management which had $39 million invested in the stock at the of September. An insider recently purchased 15,000 shares at around $10 in March 2020. The stock is up 150% since then. On February 11, ANF stock soared 3.77% to close at $25.61. ANF is one of the 15 best micro-cap stocks to buy now.
7. Trebia Acquisition Corp. (NYSE:TREB)
No of HFs: 27
Total Value of HF: $252 Million
At the end of September, a total of 27 hedge funds tracked by Insider Monkey were long this stock. One of the biggest hedge funds having stakes in the company is Nehal Chopra’s Ratan Capital Group which had $28 million invested in the stock at the end of September. The company recently announced the pricing of initial public offering of 45,000,000 units at a price of $10 per unit.
6. MagnaChip Semiconductor Corporation (NYSE:MX)
No of HFs: 27
Total Value of HF: $252 Million
MagnaChip is one of the 15 best micro-cap stocks to buy now. Howard Marks’ Oaktree Capital Management is one of the top hedge funds having positions in the stock, which had $40 million invested at the end of September. An insider purchased 5,000 shares at around $11 in August 2020. The stock is up 72% since then. MX manufactures analog and mixed-signal semiconductors as a platform solution in communications and IoT. Recently, MX launched a new brand identity.
5. GameStop Corporation (NYSE:GME)
No of HFs: 28
Total Value of HF: $164 Million
One of the biggest hedge funds having stakes in the company is Richard Mashaal’s Rima Senvest Management, with 3.22 million shares of the company . An insider purchased 500,000 shares at around $16 in December 2020. The stock is up 225% since then. RF Capital mentioned GME in its Q3 2019 investor letter:
“Gamestop is a video game retailer with over 5,700 stores across 14 countries. GME offers new and used video gaming consoles, video games (both physical and digital), accessories, collectibles, and other miscellaneous items. Customers are able to trade in consoles, games, and accessories for cash or store credit through GME’s buy-sell-trade program. GME also publishes Game Informer magazine.
The business is currently challenged due to the rise of digital downloads, competition from other retailers, and increased gaming on mobile and computers. Furthermore, earnings will continue to suffer until Q4 2020 because the industry is currently at the end of the console cycle. (Sony and Microsoft will be launching new consoles next year in Q4.) Although sales and earnings have been down significantly, at least we are seeing trough earnings or somewhere close to it.
Despite all the negative press around GME, we believe the situation looks worse than it actually is. The company has a strong balance sheet and continues to generate free cash flow. GME currently has $424 million in cash versus $418 million in long-term debt. Management has also projected adjusted diluted EPS of $1.15-$1.30 and adjusted FCF of $225-$250 million for 2019. Thus, GME should be able to stay afloat while waiting for the release of the next-gen consoles.
We made GME a 5% position. Our average cost was $5.30 per share. At this point, GME is difficult to value based on earnings. However, the strong balance sheet provides downside protection, and there will be more visibility when the new consoles and product titles launch next year. We will increase our position size if management continues to do the right things. The new CEO and CFO are off to a good start with 180-200 planned store closures and the completion of the modified Dutch auction tender offer for 12 million shares at $5.20 per share.”
4. Clear Channel Outdoor Holdings, Inc. (NYSE:CCO)
No of HFs: 30
Total Value of HF: $121 Million
At the end of September 2020, a total of 30 hedge funds tracked by Insider Monkey were long this stock. One of the biggest hedge funds having stakes in the company is Kenneth Mario Garschina’s Mason Capital Management which had $35 million invested in the stock at the end of September. An insider purchased 400,000 shares at around $1 in August 2020. The stock is up 100% since then.
3. Revlon, Inc. (NYSE:REV)
No of HFs: 32
Total Value of HF: $253 Million
REV stands 3rd on the list of 15 best micro-cap stocks to buy now. One of the biggest hedge funds having stakes in REV is Parvinder Thiara’s Athanor Capital which had $1 million invested in the stock at the end of September. An insider purchased 20,000 shares at around $23 in June 2019. The stock is down 52% since then. Mittleman Brothers mentioned REV in their Q3 2020 investor letter:
“Revlon’s (REV) stock price has been a disaster calendar YTD, dropping from $21.42 on 31 December 2019 to a low of $4.81 on 26 October 2020 (-78% to $256M market cap.).
Revlon is in a very tight spot now as it urgently needs to refinance $345M in 5.75% notes due on 15 February 2021. These bonds are trading just under $30 currently (par $100), somewhat like Revlon’s notes did in 2002 when its 8.625% notes (due in 2008) dropped to $32 before recovering to $100 (after Perelman provided more capital).
MIM asserts that Revlon’s liquidity issues are not a solvency issue, so once cured with asset sales or capital infused by Ron Perelman⁵, much better times lie ahead for Revlon. MIM thinks the probability is very low that Perelman would risk his 87% stake in Revlon to the vagaries of a Federal Bankruptcy Court.
2. At Home Group, Inc. (NYSE:HOME)
No of HFs: 34
Total Value of HF: $370 Million
One of the biggest hedge funds having stakes for HOME is Clifford A. Sosin’s CAS Investment Partners which had $155 million invested in the stock at the end of September. An insider purchased 275,007 shares at around $17 in January 2021. The stock is up 41% since then. Recently, HOME resumed its growth strategy with three new stores. The company is projecting to open 12 to 15 stores in 2021.
1. Zogenix, Inc. (NASDAQ:ZGNX)
No of HFs: 38
Total Value of HF: $409 Million
Topping the list of 15 best micro-cap stocks to buy now is ZGNX. At the end of September, a total of 38 hedge funds tracked by insider monkey were long this stock. Peter Kolchinsky’s RA Capital Management is one of the top hedge funds having positions in ZGNX, which had $98 million invested in the stock at the end of September. An insider purchased 8,000 shares at around $20 in November 2020. The stock is up 10% since then.
