While bigger can often be better in the world of stock investment, some small-cap stocks — stocks of companies with market caps under $2 billion — are also worth a look as their future performance generally has more initial upside potential.
There are plenty of companies to consider, but if you are looking this month, there are a few small-caps running ahead of the pack this summer worthy of a closer look: Sonic Automotive (NYSE:SAH), CarParts.com (NASDAQ:PRTS), and The Lovesac Co. (NASDAQ:LOVE).
Let’s find out a bit more about these three top small-cap stocks to buy in July.
1. Sonic Automotive
At the upper end of small-cap stocks at a market cap of just under $2 billion, Sonic Automotive is an auto dealership company with a strategy of strongly integrating digital approaches into its sales process, particularly for used cars. While the company originally sold mostly new cars, its EchoPark stand-alone used car dealerships are now generating excellent revenue, prompting Sonic to focus on expanding this successful brand.
Sonic’s first-quarter (Q1) results set a revenue record this year, catapulting 20.7% year over year to $2.8 billion. On the bottom line, adjusted earnings per share surged 207.5% from 2020’s $0.40 EPS to 2021’s $1.23 EPS. The results aren’t just a one-off, either; the company’s growth surpassed the broader S&P 500 in May 2020, and by July 2021 it was performing more than 20% better.
EchoPark, Sonic’s used car division, is growing faster than the company overall, promising to bring further gains in the immediate future. Sonic has melded digital into EchoPark’s buying process, streamlining that process by enabling customers and sales personnel to do a lot of the preliminary paperwork quickly and remotely online. EchoPark’s Q1 revenue grew 52.9% year over year, while its volume rose 40.6% to 19,670 vehicles sold. Highlighting this growth sector, EchoPark’s President Jeff Dyke said in the Q1 press release, “We remain committed to reaching a 140-point nationwide distribution network by 2025, which we expect to retail over half a million pre-owned vehicles annually by that time.” Dyke added that, when extrapolating from EchoPark’s success so far, he thinks Sonic is well on track to reach $14 billion in annual EchoPark revenue by 2025.
The management of Sonic Automotive also clearly has an eye on improving the value of its stock for shareholders. Its board of directors authorized an additional $250 million in share repurchases, extending a previous buyback program, and it raised the quarterly dividend to $0.12 per share, a 20% boost. With strong growth, burgeoning success in the used car market through its unique digital and delivery model, a share buyback program, and dividend payments, Sonic Automotive looks like a dynamic, efficiently run small-cap company with a potentially bright future.
As an online “high-speed, low-drag” operation free of physical retail overhead, CarParts.com is a small-cap company with red-hot revenue growth this year, and lower — but very strong — long-term guidance for sales. Revenue stepped on the gas during Q1 2021, rising 65% year over year to its highest figure ever, $144.8 million, representing the fifth quarter in a row of gains. The company still generated a net loss per share, but it has no debt and ended the quarter with $45.9 million in cash, a 28.2% year-over-year increase.
According to CarParts.com’s recent investor presentation slide deck, its growth is supported by a complete shakeup in its structure and leadership, making it much more efficient. It claims to have a new “executive team” with greater expertise, a single centralized website now designed to be friendly to mobile devices, and double the square footage of its distribution center facilities. Perhaps best of all, it extinguished all of its debt, becoming a debt-free operation.
Turning to CarParts.com’s market environment, used-car ownership — naturally a significant driver of car part purchases — looks set to continue growing for years. The used car market is expected to be larger by 3.9 million units by 2025, according to a Technavio press release. CarParts.com itself claims it is operating in a total addressable market of $314 billion. Significantly, a jump in used car prices is creating an incentive to repair used cars rather than buy new pre-owned vehicles. Bloomberg reports Edmunds.com data showing a 30% used car price surge since early 2020, even as used car sales continue climbing and pushing prices higher, simultaneously generating more demand for parts.
While steel and other raw material prices are increasing — and this may eventually increase car part prices and force CarParts.com to pass those costs on to customers — this likely won’t really affect its affordability relative to that of competitors. Those rivals will face the same pricing pressure, as well as increased physical retail store costs. Given the 9.8 million monthly visitors to its website and the other factors in its favor, CarParts.com CEO Lev Peker described his company’s future prospects during the Q1 earnings conference call by saying, “we saw robust sales that reinforced our confidence in achieving our long-term goal of 20% to 25% compounded top-line growth.”
Carparts.com finds itself smack-dab in the middle of a growth industry, able to offer very competitive prices thanks to its digital business model and distribution centers. It is experiencing strong growth and it recently reconfigured for efficiency, helping it stand out among small-caps.
3. The Lovesac Co.
This stock is perfect for small-cap investors who don’t mind their shares having some volatility and risk. Lovesac is a furniture maker specializing in beanbag chairs and reconfigurable sectional couches that has posted nearly 128% in stock price gains over the past 12 months. It still has plenty of revenue growth potential, according to management guidance, and a current dip in the stock price offers a discounted stock-buying entry point.
Mostly relying on digital sales for its growth, Lovesac appears well-positioned for the ongoing “retail apocalypse” and the strong shift to online shopping currently underway. The company is also keeping a finger in the brick-and-mortar retail pie with a current lineup of 116 showrooms spread across the U.S., which posted robust year-over-year sales growth of 182.7% during the company’s fiscal 2022 Q1 earnings report back in June. While the showrooms cannibalize some online growth now that they are fully reopened, digital sales remain strong as well.
Lovesac’s Q1 2022 metrics impressed analysts, winning several bullish predictions. The furniture maker’s revenue popped 52.5% year over year, with comparable sales surging 48.8%. After posting a quarterly net loss of $8.3 million last year during the pandemic, the company’s bottom line this year was up $2.1 million, delivering adjusted EPS of $0.13, 122.7% better than Q1 fiscal 2021. The company is also operating more efficiently, lowering selling, general, and administrative expenses (SG&A) by 1,050 basis points from 47.5% of net sales to 37% today. Its cash position has also improved, and it has paid off the deferred rent debt it incurred during the pandemic.
With popular products, plenty of cash on hand, negligible debt, a strong online presence, and growth that analysts expect to average out at 32.5% through 2024 to 2026, things are looking promising for Lovesac. The new trend towards home improvement, growing furniture purchases, and an emphasis on home comfort initiated by the COVID-19 lockdowns (and continuing strongly into mid-2021) also bode well for Lovesac’s chances of extending its strong growth into the long term, making it a good portfolio choice for those investing in small-cap stocks.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.