Published January 11th, 2020
This is a guest contribution by Tyler Laundon, Chief Analyst, Cabot Early Opportunities.
In 2019 the S&P 500 Index rose an astounding 29%. Much of that gain is the result of a horrible end to 2018 that saw stocks bottom the day before Christmas.
No doubt that end-of-year decline was exacerbated by the seemingly random Twitter post from Treasury Secretary Steven Mnuchin, writing while on vacation in Mexico on Sunday, December 23, just two days before Christmas.
In his post Mnuchin raised concerns that most market observers weren’t worried about when he stated that the nation’s six largest banks had ample credit to extend to American businesses and households.
If we all had the benefit of hindsight, we would have taken Mnuchin’s comments as a signal that it was time to jump into the market and buy stocks with every dollar we had!
Of course, hindsight is 20/20. And we can’t go back.
But we can look at what worked in 2019 after Mnuchin spoke and keep it in mind as we make decisions for the year ahead in 2020.
Specifically, I want to look at the best-performing micro-cap stocks of 2019. I pulled this list from the S&P 600 Microcap index, from which I downloaded calendar year returns then sorted from highest to lowest. After tossing out any stocks that up-listed or came public during the year (I only wanted stocks with 12 months of trading history in the index) the below names are what was left.
A couple of notes. First, many of these stocks are no longer micro-cap stocks—i.e. stocks with market capitalizations between $50 million and $300 million. But they were when 2019 began.
Second, I’d like to point out that seven of the 10 stocks are biotech stocks. That’s not too surprising given the high-risk, high-reward nature of biotech and that nearly one-third of all stocks in the micro-cap index are from the healthcare sector. But the prevalence of biotech stocks on this top performers list does illustrate the practical challenges of plucking what will be the best-performing micro-cap stocks out of the market at the beginning of the year, before they surge.
It is such a risky area of the market and for every biotech stock that soars there are several that crater. I mean that literally; of the 410 healthcare stocks that were in the micro-cap index last year almost 45% of them posted negative returns in 2019.
Still, I’m pleased to report that one of my Cabot Small-Cap Confidential advisory recommendations made the list; we also nabbed the 11th-best performing micro-cap stock of 2019. While we weren’t in these stocks as of the first of this year, subscribers have still done quite well with both.
Without further ado, here were the 10 best-performing micro-cap stocks of 2019.
Axsome Therapeutics (AXSM): +3,565%
Development-stage biotech company Axsome started the year with a share price of 2.82 but finished with a share price just over 103. The stock’s gain of 3,565% made it far and away the best-performing micro-cap stock of 2019. It’s a rags-to-riches story for a company that is now firmly out of the micro-cap asset class, with a market cap of $3.7 billion. What happened? A lot of things, but the initial jump in January 2019 came on the back of positive Phase 2 clinical data for a potential treatment of major depressive disorder (MDD). Throughout the year the company has issued many updates on other pipeline assets, including potential treatments for narcolepsy and migraines, the latter of which will see an NDA filing in 2020. It is developing product candidates for six different central nervous system (CNS) disorders and based on the trading action the market’s factoring in commercial success on at least some of them.
Constellation Pharmaceuticals (CNST): +1,075%
Constellation is another biotech stock and specializes in therapeutics for patients with abnormal gene expression. Most of the stock’s 2019 gains came since September after the company announced a private placement and then positive data on a Phase 2 trial for a combination treatment in myelofibrosis (MF) patients. After its 1,075% gain it now has a market cap of $1.7 billion.
Stage Stores (SSI): +997%
Stage Stores, a Texas-based retailer of apparel stores, was a bona fide penny stock at the beginning of 2019, which it entered trading with a share price of just 0.74. By most investors’ standards the company is still tiny; Stage Stores ended the year with a share price of 8.12 and a market cap of $250 million. Most of the stock’s 2019 gain came since August after the company announced it was speeding up a strategy shift to focus more on off-price Gordmans stores, which are mostly located between Idaho and Ohio. Shares then jumped after Q2 results released in August, and again after Q3 results (reported in November) showed comparable store sales grew 17%.
Note: Sure Dividend recommended Stage Stores as a “bonus recommendation” that was high risk, high reward, back in the May 2017 edition of The Sure Retirement Newsletter.
Kodiak Sciences (KOD): +913%
Kodiak exploded 913% in 2019 as the development-stage biotech company, which develops novel therapeutics to treat chronic retinal diseases, received good news in early trials for KSI-301, a potential treatment for multiple retinal diseases, including wet age-related macular degeneration and diabetic eye disease. With potential peak sales estimated at roughly $4 billion by 2030, assuming commercialization, it’s easy to see why the stock now sports a market cap of almost $3 billion.
Provention Bio (PRVB): +742%
Provention Bio is another biotech company, focusing on treatments for immune-mediated disease, including type 1 diabetes, Crohn’s disease, celiac disease and ulcerative colitis. The stock exploded in June when data for lead asset PRV-032 showed potential to delay diabetes. In December management reiterated its plan to complete its marketing application for the asset (for type 1 diabetes) by the end of 2020.
EverQuote (EVER): +722%
EverQuote, a stock we owned in Cabot Small-Cap Confidential but just sold at a big profit, is about as far from being a biotech company as you can get. The company operates an online marketplace for comparison insurance shopping for personal lines policies. Unlike many others on this list it’s generating revenue (expected to climb 47% to $240 million in 2019). Enthusiasm for the stock has surged as new products have hit the market that could expand sales beyond the major contributors of home and auto. EverQuote now has a market cap of around $735 million.
Arqule (ARQL): +621%
Arqule develops small molecule therapeutics for cancers and rare diseases and was having a great year, rising from under 3 at the beginning of the year to around 10 in December. Then it doubled again to 20 after a tender offer came in from Merck. That offer expires on January 15.
Iveric Bio (ISEE): +615%
Iveric Bio has a sketchy past, having gone public at 22 in 2013 and rising to almost 80 by the end of 2015. It then collapsed and after several years of doing nothing ended 2018 just north of 1.00. That’s the risk of early-stage biotech stocks. The surge didn’t come until October, when Iveric announced successful data from a Phase 2b trial for C5 inhibitor Zimura in patients with dry age-related macular degeneration. Shares shot to 4.00 immediately afterward and have advanced to around 8.50 since.
Microbot Medical (MBOT): +491%
Microbot Medical makes micro-robotics that aid in minimally invasive surgeries. It’s not generating revenue yet and was volatile in 2019 as news related to product development, patent wins and capital raises have dripped out to the market. Much of the early-year gains were just the stock rebounding from a huge selloff at the end of 2018. If you step back to a longer-term chart it is hard to pull much that’s positive from this company, which has seen shares slide and split multiple times since going public in the early 1990s.
Orion Energy Systems (OESX): +488%
Like Stage Stores, Orion Energy was a true penny stock a year ago. The company entered 2019 with a share price of just 0.57. Even after rising 488% last year it still only has a share price of 3.35 and a market cap of $103 million. It specializes in energy management lighting systems and based on the last four quarters business has been good. That said, this seems like a lumpy business with a lot depending on the size and cadence of contract wins (and losses).
Where to Find the Best Micro-Cap Stocks for 2020
That’s a wrap for today. Clearly, biotech stocks were the leaders in the micro-cap space last year if you just look at the performance of the top 10. I suspect they will be again in 2020 once all is said and done. However, picking the few big winners from the hundreds of potential losers is not for the faint of heart!
If you’d like a little help achieving big gains in small companies, check out my Cabot Early Opportunities and/or Cabot Small-Cap Confidential advisories. I can’t promise we’ll have any 3,000% winners in 2020. But I’m sure we’ll have plenty of big gains that will more than offset the modest cost of a subscription.