Two Small-Caps I Expect to Shine
Tariff talk has sent jitters down Wall Street, but here's why smaller names might be less impacted by the trade wars.
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Increasing worries around new potential tariffs Friday sent the market into a bit of the tailspin to end the trading week on a sour note. The January Bureau of Labor Statistics jobs report also came in a bit more tepid than the consensus. Still, equities sported minor weekly losses for the week. News around tariffs will likely continue to dominate financial headlines and will retain the ability to spook investors in the months ahead.
That said, the uncertainty around the direction of tariff policy could boost the fortunes of small-cap stocks vs. their larger brethren. The continuing strengthening of the dollar will increasingly ding the profits from overseas sales. Obviously, large American multi-nationals like Apple AAPL are much more exposed to this development than small-cap companies that get most or all of their sales from North America.
In addition, the small-cap Russell 2000 has substantially underperformed the S&P 500 and Nasdaq for a couple of years now. Profitable small-cap names also tend to have significantly lower valuations based on various metrics such as price-to-earnings and price to sales ratio than the companies in S&P 500. Small-cap companies should also benefit from a less oppressive regulatory environment, potential reshoring and should be largely immune to new tariff threats. Permitting and environmental review processes could become easier and faster to navigate.
Here are a couple of small-cap companies that should prosper regardless of what happens with tariff and trade policies in the quarters ahead:
Acadia Pharmaceuticals ACAD is typical of the small- and mid-cap names I like in the biotech and biopharma space. The company has become profitable and has two key products on the market. Leadership expects the company to exceed $1 billion in sales in fiscal 2025. The stock trades at just three-times revenues and the company is producing an increasing amount of free cash flow. The firm should close fiscal 2024 with some $600 million of cash on its balance sheet as well.
LifeMD LFMD is also a name I have added some shares to my core stake in during the first few weeks of 2025. The company is headquartered out of New York City and has a domestic customer base. LifeMD provides several telehealth services, and growth here has been boosted by a GLP-1 weight management offering that was launched in 2023. The company also owns three quarters of the software-as-a-service document business called WorkSimpli. Profits should more than double in fiscal 2025 on 25% revenue growth. Like Acadia, the company is seeing increasing free cash flow and has a solid balance sheet. The stock is reasonably valued at 1.25-times expected fiscal 2025 sales.
At the time of publication, Jensen was long ACAD and LFMD.
