Small-cap stocks are shares of companies with market caps between $300 million and $2 billion. These stocks tend to have more room for growth, making them good bets for investors looking to beat the market over the long term. However, it's important to invest in quality companies with business models that can stand the test of time.
Here are two top small-cap stocks that look ready for the big leagues.
The first pick is Celsius Holdings (CELH -0.79%), a fitness drink company whose sales are exploding as its products penetrate the European market. The second pick is Upwork (UPWK -0.99%), a freelance platform set to benefit from the work-from-home megatrend. Both stocks would make great buys in September.
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1. Celsius Holdings: massive international expansion
Celsius Holdings is a small-cap beverage company known for its flagship Celsius brand of fitness drinks. The stock has performed exceptionally well this year, with shares up by a staggering 308% year to date compared to the S&P 500's return of just 7.5% over the same period. With a current market cap of $1.35 billion, Celsius isn't as blatantly undervalued as it was earlier in the year. But long-term investors can still find value in the shares because of the company's strong organic growth and explosive international expansion.
Celsius reported second-quarter earnings on August 6, and the results demonstrate the company's aggressive growth strategy.
Total revenue soared 86% from $16.1 million to $30.0 million due to strong performance in the United States and Europe. In the North American market, which represents 69% of net sales, Celsius aims to drive continued growth by stocking its products at a wider range of retailers. The company now boasts over 75,000 locations nationally and plans to roll out at Speedway gas stations in the fourth quarter of 2020.
Celsius's European business increased its net sales by 595% following the acquisition of Nordic wellness company Func Foods in the fourth quarter of fiscal 2019.
The acquisition is a highly synergistic move, because the combined business can take advantage of Func's European distribution channels and its Fast Sports Nutrition line, which is another scalable revenue opportunity for Celsius. Management hasn't provided any color on how fast they expect the European operations to grow going forward, but the company looks poised for success because of its improved distribution platform.
2. Upwork: a small valuation with big potential
Working from home is more than just a fad -- it's a megatrend. And few companies are better poised to exploit this opportunity than Upwork, a global freelancing platform that helps connect companies with qualified talent. The stock has performed relatively well amid the coronavirus pandemic, with shares up 51% year to date.
Upwork is poised for continued success because of its fast-growing addressable market and scalable business model.
According to data from fintech giant Mastercard, the gig economy (which includes everything from ride sharing apps to remote work platforms like Upwork) is projected to expand at a CAGR of 17% until 2020 due to evolving social attitudes, rising costs of living, and increasing digitization rates around the world. Upwork is positioned to capture much of this growth because of its early-mover advantage.
Upwork reported second-quarter earnings on August 4, and the results demonstrate that the company is rapidly scaling up its business model.
Total revenue grew 19% to $87.5 million based on strong performance in Upwork's marketplace and managed services platforms, while the company's gross profit margin remained constant at 70%. Upwork shells out a substantial amount of cash on operating expenses, and management will have to maintain the rapid revenue growth (while keeping costs in check) to unlock maximum value for investors. To achieve this goal, Upwork is successfully attracting more profitable clients by focusing on more lucrative technical and customer support freelance categories.
Upwork also boasts a strong balance sheet which can help it sustain current losses ($11.02 million in the second quarter ) until operations reach a profitable scale. The company boasts a total of $146.36 million in cash and marketable securities on its balance sheet and reports current debt of $7.59 million.
