Small-Cap Tech Stocks for 2019
The small-cap tech stock forecast for 2019 just got a lot more interesting.
The decade-long bull market has been nothing short of spectacular. There’s been the odd roller-coaster ride, but when it comes to the risk/reward payoff, there’s been little risk and plenty of reward. The one sector that has benefited the most is technology.
The recent stock market sell-off makes the best small-cap tech stocks a lot more attractive than they were back in the summer. And with the U.S economy chugging along, the recent sell-off looks like it will be temporary.
Small-cap stocks did well in the first half of 2018, but the second half of the year has been ugly, especially from September to November, with small-cap stocks giving up their year-to-date gains.
The carnage didn’t stop there. As of November 28, the Russell 200 was down 1.3% in 2018. The S&P 500, meanwhile, was up a princely 1.5% on the year and the Nasdaq was up four percent.
For small-cap investors, the last three months have been nothing short of a nightmare. And for good reason: investors were focused on the November midterm elections, the rising interest rates, and the ongoing fears of a trade war between the U.S. and virtually every other country.
Small-cap stocks do not generally react well to rising interest rates. On the other hand, when it comes to trade wars, many small-cap stocks do not rely heavily on sales outside the U.S.
Then again, there is growing consensus that U.S. economic growth could slow in the next year, which is not good for companies that rely on the U.S. for the majority of their revenue.
Tech Stock Forecast
The small-cap tech forecast looks bullish for 2019.
That’s because there’s a silver lining. The recent sell-off means many tech stocks are selling at a discount. Because investors reacted too harshly during the sell-off, many stocks are now considered cheap tech stocks.
The midterm elections are now over, third-quarter earnings results have been strong, and investors seem comfortable with interest rate hikes. This could point to an end to the recent sell-off, and even a year-end rally.
This bodes well for tech stocks as we head into 2019. While a rally would help medium- and large-cap stocks, small-cap stocks tend to outperform their larger peers over the long run because they are still in the robust, early stages of their growth.
Small-Cap Tech Stocks List
The following small-cap tech stocks could be some of the biggest winners in 2019.
Michigan-based Stoneridge, Inc. (NYSE:SRI) designs and manufactures electronic and electrical components, modules, and systems for the automotive, motorcycle, commercial vehicle, agriculture, and off-highway markets.
With a global footprint in 15 countries, the company’s products control and connect key vehicle systems, including emissions, powertrain, exhaust, seating, lighting, and security.
Through the first half of 2018, the Stoneridge stock price advanced 53%. It’s been a different story in the second half of the year, especially since the market-wide sell-off began in early October.
Unlike most small-cap tech stocks, this one is still in the black. Trading around $26.25, the Stoneridge share price is up by about 14% in 2018. It’s down by about 30% from its June high of $37.69, however.
Still, things are looking up for the company. While the auto industry is facing headwinds, Stoneridge is not. In fact, it reported strong third-quarter results, which helped the company’s share price rebound from its recent fall.
Chart courtesy of StockCharts.com
On October 26, Stoneridge announced that third-quarter revenue increased 2.6% year-over-year from $203.6 million to $208.9 million. Third-quarter sales resulted in a gross margin of 30.3% and an adjusted operating margin of nine percent. (Source: “Stoneridge Reports Strong Third-Quarter 2018 Results,” Stoneridge, Inc., October 26, 2018.)
Net income was up 65% year-over-year from $8.1 million ($0.28 per diluted share) to $13.3 million ($0.46 per diluted share). Adjusted earnings per share (EPS) for the third quarter were $0.47, a 62% year-over-year increase from $0.29.
Each of the company’s segments contributed to the company’s growth, delivering adjusted operating margin performance that exceeded the same period last year.
At the end of the third quarter, Stoneridge had cash and cash equivalent balances totaling $60.7 million. The company’s total debt was $104.0 million as of September 30.
Thanks to the low cost of debt and the company’s strong cash position, the board of directors authorized a $50.0-million share buyback program over the next 18 months.
For the remainder of the year, Stoneridge reaffirmed the low end of the previously provided adjusted EPS range, with a full-year midpoint guidance of $2.05.
Ceragon Networks Ltd
Ceragon Networks Ltd (NASDAQ:CRNT) bucked the broader trend during the recent sell-off, rising significantly. Trading around $4.30 per share, Ceragon’s share price is up by about 116% since the start of January and up by about 25% since the start of October.
Chart courtesy of StockCharts.com
Ceragon’s outlook for 2019 looks bullish.
The Tel Aviv-based company provides high-capacity microwave ethernet and time-division multiplexing (TDM) wireless backhaul solutions to wireless service providers. The company’s products are used by more than 460 service providers and hundreds of network owners in more than 130 countries.
On November 5, Ceragon announced that, in the third quarter, revenue increased 13.9% year-over-year from $76.0 million to $86.5 million. The company’s third-quarter gross margin was 35%, slightly down from 35.1% in the same prior-year period. (Source: “Ceragon Networks Reports Third Quarter 2018 Financial Results,” Ceragon Networks Ltd, November 5, 2018.)
Operating income was $7.9 million, up from $5.7 million in the same prior-year period.
Third-quarter net income was $6.2 million ($0.08 per diluted share), a 77% increase from the $3.5 million ($0.04 per diluted share) in the third quarter of 2017.
Ceragon ended the third quarter with cash and cash equivalents of $41.3 million, up from $29.4 million at the end of the second quarter.
“We are pleased to report an excellent third quarter, with revenues above the upper end of our quarterly run rate and net income growing both sequentially and versus Q3 of 2017,” said Ira Palti, president and CEO.
We are achieving our goal of growing net income and delivering strong cash flow, even as we continue to invest aggressively in our next generation 5G solutions, and we remain on track to attain an increase in non-GAAP net income in 2018 compared to 2017. We manage the business with net income growth as our most important metric, and our goal is to report further growth in non-GAAP net income for 2019 as well.
Comtech Telecomm. Corp.
Comtech Telecomm. Corp. (NASDAQ:CMTL) was having a great year until the October sell-off. The company entered 2018 trading at $21.91, and on September 26, it hit an intra-day high of $36.82 for a gain of 68%.
Then October happened. Currently trading around $25.20, Comtech’s share price is down about 31% from its September highs but is up about 16% year-to-date.
Chart courtesy of StockCharts.com
The New York-based company designs, develops, produces, and markets products, systems, and services for advanced communications. Comtech sells its products to a diverse global customer base and says it’s a leader in most of the market segments it serves.
On September 26, Comtech announced its financial results for the fourth quarter of fiscal-year 2018, ended July 31.
Fourth-quarter net sales increased 13.3% year-over-year from $147.8 million to $167.4 million. Net income for the period was up slightly year-over-year from $7.3 million ($0.31 per share) to $7.5 million (also $0.31 per share). (Source: “Comtech Telecommunications Corp. Announces Results for Fiscal 2018 Fourth Quarter and Full Year and Provides Fiscal 2019 Guidance,” Comtech Telecomm. Corp., September 26, 2018.)
Full-year revenue was up by 3.6% from $550.4 million to $570.6 million, representing the third consecutive year of revenue growth. Full-year net income was up by 88% from $15.8 million ($0.67 per share) to $29.8 million ($1.24 per share).
Excluding one-time events, the company’s full-year net income would have been $18.0 million ($0.75 per share).
Fred Kornberg, president and CEO, noted, “We enter fiscal 2019 with a record high backlog and strong business momentum in each of our two operating segments. I believe we are well-positioned for fiscal 2019 to be another successful year.” (Source: Ibid.)
Why Choose Small-Cap Companies?
The U.S. economy is strong, and the revenue of most small-cap companies is tied to the U.S. economy. Technically, this means they are safer than larger companies that rely on foreign sales to juice their revenue.
This is an important factor, especially for those companies, big and small, that sell their products in countries that are facing political upheaval or are on the receiving end of trade wars.
For the most part, small-cap companies rely on U.S. sales for the majority of their revenue, allowing them to take advantage of the strong U.S. economy.
Financially robust small-cap tech companies can take advantage of the growing emergence of cutting-edge technology.
This situation bodes well for small-cap tech stocks as we head into 2019.