Small-cap stocks are back.\u00a0If the trend continues \u2014 which is my guess \u2014 there are more big gains to be made because the group has been so badly hammered. I suggest five under $5-per-share names below.\u00a0<\/p>\n
First, about that small-cap snapback. This is the early stage of a new bull market for small-company stocks. Once the S&P 500 Plus, U.S. interest rates are becoming more normal. Near-zero real rates have been a headwind for small-caps. Low rates favor \u201clong-duration\u201d assets like the tech- and biotech stocks that have a lot of their earnings pay off in the distant future. Low discount rates in valuation models make long-duration assets look cheaper. Now that is changing, and small-caps will benefit, says James Stoeffel, a manager of the Royce Small-Cap Opportunity Fund\u00a0 During the Great Financial Crisis, both large-caps and small-caps fell by roughly the same amount. Last year, small-caps fell a lot more, notes Kevin Rendino, CEO and portfolio manager at 180 Degree Capital Cheap valuations rarely tell you when a group will outperform. But the deep discount tells you a group will likely outperform by a lot once it gets rolling, notes Michael Corbett of Perritt Capital Management, which specializes in investing in small companies.\u00a0<\/p>\n I\u2019ve noticed over three decades of writing about U.S. markets that many investors develop a deep fascination with sub-$5 stocks whenever animal spirits prevail. That\u2019s understandable; under-$5 stocks can produce big percentage gains, fast. Many companies with low-priced stocks need a turnaround, and when you find one making positive changes, the gains can be impressive. Finally, many sub-$5 stocks are uncovered by Wall Street. Bullish developments are less likely to be priced in, so you can find good bargains. <\/p>\n If you get bitten by the sub-$5 bug, just keep this in mind: these stocks are risky. Do not take concentrated positions. Royce Small-Cap Opportunity, for example, holds around 250 stocks and the median position size is just 0.37% of the portfolio. The fund caps its positions at 1%. \u201cYou should look to have a fair level of diversification,\u201d Stoeffel cautions.\u00a0<\/p>\n Below are five under-$5 stock holdings chosen by the fund managers who shared their insights above. Avoid buying these stocks if they move above the limit price. These bounce around a lot and you don\u2019t want to buy a spike. <\/p>\n MamaMancini\u2019s Holdings <\/strong> Buy limit: $3<\/p>\n Back in 1921, Anna \u201cMama\u201d Mancini moved to Bay Ridge, Brooklyn, from Bari in southern Italy. Her old-world Italian recipes were handed down to her grandson, Dan Dougherty. Those treats formed the basis of this food company he founded. It now sells over 50 different all-natural lines of food to grocery stores and distributors. The company markets on QVC and its products are available at Walmart, Costco Wholesale and Albertsons, among others.<\/p>\n The stock got hurt during the past two years by supply chain issues and inflation. But it has fixed supply chains and tackled the inflation issue by raising prices and is growing via acquisition. MamaManicini\u2019s closed at the $3 buy-limit on Friday.<\/p>\n DHI Group <\/strong> Buy limit: $4.10<\/p>\n The job market remains tight. This favors recruiters like DHI. It specializes in two areas where there is a scarcity of available workers: Tech, and jobs that require government security clearances. DHI gets its revenue from companies who pay subscription fees to post jobs on its websites Dice and ClearanceJobs, and search its databases for employees.<\/p>\n Dice has 8,300 subscribers who offer 7.5 million job candidates. That makes DHI one of the largest tech recruiters in the U.S., says James Harvey, another Royce Small-Cap Opportunity manager. These customers like the service. The subscription renewal rate is 93%.\u00a0<\/p>\n DHI stock has been hit recently because new customer adds have flattened. That should change, Harvey says, because of projected tech-worker shortages. DHI estimates there will be a shortfall of five million workers to fill the 30 million tech jobs expected by 2026. ClearanceJobs has more than 2,000 subscribers and it continues to grow, recently at 15% year over year.\u00a0<\/p>\n Quantum Corp. <\/strong> Buy limit: $1.10<\/p>\n Quantum offers data storage and management products. It specializes in products that help store and search video, images, scientific data and other large datasets. This makes it a play on the mega-trends of AI, machine learning, and data analytics. Its products are also used in video editing, streaming, and high-speed backup.\u00a0<\/p>\n Though this company faces competition from giants like the EMC division of Dell Technologies, International Business Machines and NetApp Rendino at 180 Degree Capital says Quantum has competitive offerings.\u00a0<\/p>\n \u201cThis is the year where they show they can grow the business and margins or they will have to sell the company,\u201d Rendino says. As an activist manager, he plans to push in that direction, if needed. \u201cThe company may be too small to be public,\u201d he says. The implication is that either scenario \u2014 continued growth or a sale \u2014 would benefit shareholders.<\/p>\n 4. Heritage Global (HGBL<\/strong>)<\/p>\n Buy limit: $4.10<\/p>\n Heritage Global Economic downturns like this one bring in more business. U.S. bankruptcies increased 38% year-over-year as of March, Bank of America reports.\u00a0<\/p>\n \u201cThe volumes are increasing,\u201d says Corbett of Perritt Capital Management, which owns this stock. \u201cTheir business is substantially improving every quarter.\u201d First quarter revenue grew 77.5% to $16.6 million, and net income advanced more than four-fold to $2.8 million. \u201cThe current economic landscape is proving favorable for our growth,\u201d says CEO Ross Dove. \u201cAs we move through 2023, we expect to build upon the momentum demonstrated in the first quarter.\u201d<\/p>\n 5. Ribbon Communications (RBBN)<\/strong><\/p>\n Buy limit: $3<\/p>\n Ribbon Communications Three factors may boost the stock. First, growth in demand for bandwidth is being driven in part by more people working from home. Next, governments worldwide are banning equipment from China\u2019s Huawei Technologies from national networks. \u201cIt opens up this huge market that has to be filled,\u201d says Stoeffel, at Royce. <\/p>\n Finally, this is a turnaround story. \u201cTurnarounds take longer than you think. We are now three years into it, and they are getting traction with customers,\u201d Stoeffel says. The company reported a 7% increase in first quarter sales to $186.2 million.\u00a0One other positive: Ribbon\u2019s CEO, who has an excellent record here, recently purchased $1.35 million worth of stock at $2.60 a share. The nice size and the CEO\u2019s record add up to a strong insider signal.<\/p>\n
\n SPX,
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\n rises more than 20% off a market bottom (which just happened), it keeps going up over the next year 92% of the time \u2014 posting 19% returns on average, notes Savita Subramanian, head of U.S. equity strategy & U.S. quantitative strategy at Bank of America Merrill Lynch. This matters, because as investors figure this out and enjoy the ride they will get more confident \u2013 shifting to more \u201crisk on\u201d asset classes like small-caps.<\/p>\n
\n RYPNX,
\n
\n TURN,
\n
\n which specializes in small-cap turnarounds. The upshot: Small-caps are as cheap relative to large-caps. The p\/e for small-caps is around 75% that of large-caps, compared to 100%-120% over the period from 2008 to 2020. \u201cThis makes little sense to us, and it creates tremendous buying opportunity,\u201d Rendino says.\u00a0<\/p>\nDiversify in small caps<\/strong><\/h2>\n
\n MMMB,
\n
\n DHX,
\n
\n QMCO,
\n
\n HGBL,
\n
\n is a liquidator. It picks up unwanted equipment, real estate and inventory from companies that are streamlining or going out of business. Then it re-sells the goods. The company has another division that assumes bad loans from banks and uncollected receivables. Then it attempts to collect.\u00a0<\/p>\n
\n RBBN,
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\n sells communications equipment. Telecom giants are customers, which indicates that Ribbon markets competitive products. Verizon Communications
\n VZ,
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\n for example, accounts for about 15% of the company\u2019s revenue.\u00a0<\/p>\n