Finding the right small-cap stocks to buy and hold can be a real challenge.
Mid-cap and small-cap stocks have been the worst hit in the 2022 market correction. This comes after multi-bagger returns from dozens of stocks from this space last year. Through decades, markets have gone through phases of euphoria and extreme pessimism.
If there is one lesson to be learned, it’s to grab quality stocks at a deep discount during correction. There are several attractive small-cap stocks to buy and hold amidst economic and market uncertainty.
Depending on age and risk-taking ability, investors allocate funds between blue-chip, growth and small-cap stocks. Because of the high beta, the allocation towards small-cap stocks is the lowest.
It’s however, not surprising if the best returns come from small-cap names. Once the market headwinds wane, the small-cap stocks discussed in the column can deliver manifold returns.
In the last market rally, several small-cap stocks with weak fundamentals were among the outperformers. However, I have screened small-cap names with sound business fundamentals. Investors are unlikely to lose their sleep by holding these stocks.
Let’s discuss the reasons that make these small-cap stocks to buy and hold attractive at current levels.
| BLNK | Blink Charging | $13.79 |
| RADA | Rada Electronic | $10.50 |
| TLRY | Tilray Brands | $3.31 |
| RIG | Transocean | $3.25 |
Blink Charging (BLNK)
The electric vehicle charging infrastructure is likely to be a key investment theme in the coming years. The United States is targeting five-fold growth in EV chargers by 2030 to 500,000. Europe is also estimated to require 65 million chargers by 2035 with a potential investment of $134 billion.
Given this opportunity, Blink Charging (NASDAQ:BLNK) stock is an attractive after a correction of 48% in 12 months. For Q2 2022, Blink reported 164% growth in revenue on a year-on-year basis to $11.5 million.
With organic growth and acquisitions, Blink already has presence in the U.S. and Europe. The company currently has presence in 19 countries. Given the big addressable market, revenue growth is likely to be over 100% in the coming years making this one of the small-cap stocks to buy and hold for the long term.
It’s also worth noting that the company’s service revenue (recurring) is increasing at a healthy pace. As the number of charging stations swell, recurring revenue surge will translate into EBITDA margin expansion. With these positives, I expect BLNK stock to trend higher from oversold levels.
Rada Electronic (RADA)
Among small-cap stocks to buy and hold, Rada Electronic (NASDAQ:RADA) is a hidden-gem. The defense stock can be a potential multi-bagger as global defense spending remains robust amidst geopolitical tensions.
Rada Electronic is focused on the tactical radar market. The company believes that the addressable market for tactical radars is $6 billion. Further, in July, the company announced a merger agreement with Leonardo DRS.
The latter is a provider of advanced defense electronics products and technologies. Once the merger is completed, the addressable market will expand. Currently, the annual market size for the company’s products is $19.2 billion.
Clearly, the merger is likely to be a value creator. It’s also worth noting that the merged entity will have a net-debt-to-adjusted EBITDA position of 0.6.
This provides ample financial flexibility for accelerating growth. Currently, the potential merged entity has guided for low double-digit adjusted EBITDA growth. Overall, with positive industry tailwinds, RADA stock looks attractive and worth holding for the next few years.
Tilray Brands (TLRY)
The markets were disappointed as Tilray Brands (NASDAQ:TLRY) reported an earnings miss for Q1 2023. However, investors need to look at deeply undervalued cannabis stocks with a long-term investment horizon. It’s one of the best small-cap stocks to buy and hold in the marijuana space.
In particular, at a time when President Biden has revived hopes of an accelerated legalization of cannabis. It’s also worth noting that Tilray has set an ambitious target to achieve $4 billion in revenue by 2024.
This might look steep if regulatory hurdles sustain. However, if marijuana is legalized in the coming quarters, Tilray is positioned to significant revenue acceleration.
Tilray is also interesting considering the fact that the company has made significant inroads in Europe. Besides recreational cannabis, the company is also focused on evidence-backed medicinal cannabis. This can be a potential revenue upside catalyst.
I also like the fact that Tilray expects to be free cash flow positive in operating business units for financial year 2023. With economies of scale, cash flows will accelerate in the coming years and boost the company’s financial flexibility.
Transocean (RIG)
I remain bullish on the energy sector and Transocean (NYSE:RIG) is an attractive stock among small-cap stocks to buy and hold. Transocean is a provider of offshore drilling rig services with 100% focus on ultra-deep-water and harsh environment rigs.
With oil remaining above $80 per barrel, offshore drilling activity has gained traction. As a result, Transocean has witnessed healthy growth in its order backlog that currently stands at $7.4 billion. The backlog provides clear cash flow visibility for the next few years.
Additionally, with new contracts at an attractive day-rate, Transocean is positioned for EBITDA margin expansion in 2023 and beyond.
Transocean is also likely to witness revenue growth as cold stacked rigs are operational on sustained demand. It’s also worth noting that Transocean plans to deleverage in the next few years. As the company’s credit profile improves, RIG stock is likely to trend higher.