Many investors have a simple reason to choose to leave small-cap stocks out of their portfolios. While these companies as a group tend to outperform the broader market, the risk of owning them is amplified by their relatively unprovoked market positions. And even if you find a winning business, you'll probably have to endure intense volatility on the way to posting these market-beating returns.
However, knowing the key risk before buying a small value stock can help you weather the inevitable periods of intense stock price fluctuations. Restricting purchases to high-quality companies with attractive growth potential puts you in the best position to achieve solid returns from investing in small-cap stocks.
With that balance in mind, let's look at a few small companies that seem to have what it takes to generate healthy long-term gains.
. Stitch Fix
Stitch Fix (NASDAQ: SFIX) shares have been intensely unstable in 2019, with gains from 90% to today's 16% increase on the year. Nevertheless, the e-commerce specialist, who hopes to disrupt the clothing industry, has stayed right on its impressive growth path through the wide swings.
Investors are concerned about competition from far larger companies including Amazon and these concerns may color the response to Stitch Fix's forthcoming earnings report set for October 1. However, the sentiment may quickly recover as CEO Katrina Lake and her team expand their customer base in the female demographic core as they push into new areas such as men's and children's clothing over the next few quarters. .
Robotic Cleaner Specialist iRobot (NASDAQ: IRBT) would not have qualified as a stock just a few months ago when the market capitalization hit the $ 4 billion mark. But several negative factors have accumulated to send shares lower by almost 50% since then.
The company is caught at the crossroads of a tough US-China trade war, for one. Not only does the splash increase the cost of producing Roomba vacuum cleaners, but it also slows the growth of the industry. The expansion challenges are undoubtedly compounded by the continued competitive penetration of this small but rapidly growing industry niche.
Managing Director Colin Angle has predicted that sales profits will eventually return when costs return to their normal levels. iRobot is also working to eliminate customs risk by spreading its manufacturing base across China. The bad news is that it will take time for this initiative to isolate it from trade deviations.
On the bright side, the demand for the latest products is strong. iRobot's dominant market position is also likely to hold up, as competitors are all in the same boat when it comes to tackling stud costs. These factors form the basis for a potentially sharp downturn in the stock after trading problems disappear. But shareholders must be willing to see their investments fluctuate in value as they wait for more clarity on the short-term direction of iRobot's otherwise healthy business.