As investors look forward in preparation for 2023, small-cap stocks should be a key area of research. Overall, the majority of Wall Street estimates large-cap stocks in the S&P 500 (NYSE: SPY) to drop or remain largely unchanged over the next twelve months. Market watchers are anxiously watching the Federal Reserve’s every move, as they continue to raise interest rates and increase the risk of a global recession. As of December 2022, major global investment banks maintain a price target range between 3,675 and 4,500. As of this writing, the S&P 500 is trading at 3,895.
The potential hit to large-cap earnings continues to be debated by investors, but small-caps remain an area of the market that actually has growing bullish sentiment. According to Bank of America (NYSE: BAC), Chief Investment Strategist Michael Hartnett said "Secular trends of stagflation, reshoring, localization, fiscal stimulus = small cap bull in 2023."
In a recent blog post by Alliance Bernstein (NYSE: AB), James MacGregor, CFA (CIO of US Small & Mid Cap Value Equities), Bruce Aronow, CFA (CIO of Small & Mid Cap Growth Equities) and Samantha Lau (Co-CIO of Small & Mid Cap Growth Equities) penned an interesting article that supports the idea that small-cap stocks are further along in the recovery.
“Small-cap stocks are also trading at extremely depressed valuations—the lowest in 20 years—compared to larger companies, based on price-to-earnings ratios. Current geopolitical tensions and macroeconomic uncertainties have disproportionately and indiscriminately impacted small companies. Investors have discounted further potential hazards for small-caps, without regard to company fundamentals. So, we think firms that offer resilient business models will stand out and benefit the most along the road to recovery,” according to the Alliance Bernstein article from December 2022.
Looking ahead to 2023 with small-cap bullish sentiment building, here are two stocks that we believe have resilient business models and could weather any further economic & market volatility next year:
Small-Cap #1: Asure Software (NASDAQ: ASUR)
Asure Software is an Austin, Texas-based human capital management (HCM) cloud solutions provider in the United States. While the company is a small-cap with a current market cap of just under $180 million, Asure has been in business since 1985 and has continued to focus on developing tech innovations to help small-to-medium-sized businesses (SMBs) with streamlining their back office operations, such as human resources, taxes, payroll, employee benefits, and more.
Shares of Asure have vastly outperformed the overall market with a positive year-to-date (YTD) gain of over 8.5%, as of mid-December 2022. This outperformance is a byproduct of the company’s strong resilience experienced throughout an economically-volatile year in 2022.
Asure’s resilience was confirmed once SMBs began cutting costs across the board to prepare for a potential recession and continued economic uncertainty. However, these SMBs also realized that certain costs, like Asure’s suite of cloud HR technologies, actually help to save more money at the end of the day. Streamlining operations and helping to automate certain back-office tasks are essential for SMBs in all economic conditions, especially during uncertainty. In short, Asure’s payroll, FlexTax platform, vast 401(K) integrations, and other services actually help companies cut costs.
Analysts covering Asure continue to maintain a bullish outlook on the small-cap tech company. Currently, the company has six analysts covering the stock with an average target price of $11.00 and a “buy” rating. Asure management is also forecasting a bullish 2023 after raising guidance during its Q3 2022 earnings release.
For the fourth quarter of 2022, management estimates revenues to come between $23.5 million and $24 million. Adjusted EBITDA for the period is estimated to be between $3 million to $3.5 million. For the full-year 2023, Asure management sees total revenue between $98 million and $102 million, with an adjusted EBITDA margin range of 14% to 16%.
Beating estimates is nothing new for Asure. Over its past nine quarterly financial results dating back to the third quarter of 2020, Asure has either met or exceeded revenue and EBITDA guidance. The only time Asure slightly missed estimates was back during Q1 2021, when EBITDA came in just under consensus.
However, from Q2 2021 to current, Asure’s earnings outperformance has picked up steam. This perfectly aligns with the tightening of the overall macro-economic environment, which has been bullish for Asure, as SMBs look to cut costs and streamline operations.
Despite its earnings prowess, Asure continues to fly under-the-radar. However, it appears only a matter of time before the Street begins to take notice of Asure on a grander scale. 2023 could be the year that Asure finally emerges as a key small-cap player, as the economic environments looks to continue favorable conditions for the company.
For more information on Asure Software, visit https://www.asuresoftware.com and https://spotlightgrowth.com/analysts-reiterate-bullish-stance-on-asure-software-nasdaq-asur-collectively-raise-target-price-to-average-of-11-00/
Small-Cap #2: Terran Orbital (NYSE: LLAP)
For space stocks, 2022 has been extremely painful. One of the largest space ETFs, the ARK Space Exploration & Innovation ETF (NYSE: ARKX) holds total assets of $265.19 million and has declined nearly 32% YTD, as of this writing. Individually speaking, Terran Orbital Corporation has had a 2022 to forget with a return of -86% YTD, through mid-December 2022.
However, Terran Orbital is not like other SPAC space hype stocks out there and while the company is still working on profitability, its operational achievements set the company apart from its competition. Since its establishment in 2013, Terran Orbital has supported over 80 missions, which have resulted in the launch of more than 200 satellite services for NASA and the U.S. Department of Defense.
Furthermore, Terran Orbital has continued to see strong revenue growth and even secured a $100 million investment from major aerospace & defense company Lockheed Martin Corp. (NYSE: LMT). The company also entered into a strategic cooperative agreement with Lockheed that extends collaboration into 2035.
During the third quarter of 2022, Terran Orbital reported record revenue of $27.8 million, which represents year-over-year growth of 171% compared to the same period last year. The company's backlog exploded by 168% to $198 million since the end of 2021. The space company did report a net loss of $27.4 million, but that was an improvement compared to Q2 2022’s net loss result of $32.3 million.
Currently, Terran Orbital has six analysts covering the stock. All six maintain a “buy” rating on the space company, with an average target of just over $11.00. This represents a potential upside of over 680% from its current price of $1.41.
For more information on Terran Orbital, visit https://terranorbital.com/ and https://spotlightgrowth.com/will-space-stocks-deliver-out-of-this-world-returns-over-the-long-term/
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