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Small-Cap Growth Stocks To Watch In The New Year

Small-cap stocks can be a more risk-on approach for investors searching for outsized gains or multi-bagger returns — here’s three to watch.

Small-cap stocks are generally categorized as a company between $300 million and $2 billion in market capitalization. These companies carry far more risk than your average blue-chip stock or exchange-traded fund (ETF). For the purpose of this article, we’re going to cheat a little and look at companies under a $5 billion market cap. 

LoveSac

Lovesac (NASDAQ: LOVE) is a furniture company with a twist. Lovesac pursues a sustainable business model and offers a lifetime guarantee on its hard piece ‘sactionals’; the name given to its adaptable couches. Couches are customizable, so if you want an L-sit, more footrests or sides, or want to add more seats, that can all be done by Lovesac who has perfected adjustable couches.

Its latest product offering Stealth Tech looks to compete with home cinemas too, by embedding speakers, vibration, phone charging capabilities, and integrated bass that truly turns your home’s interior into a home cinema — and of course, you can get Stealth Tech installed in an existing couch too.

Lastly, financials. Lovesac is profitable, has beaten earnings expectations in the last four consecutive quarters, had a 47% increase in year-over-year (YoY) sales in its last earnings report, has margins consistently over 50%, the average customer spend is $2,000, and 38% of all transactions are from repeat customers which exhibit a loyal customer base. 

Upwork

Upwork (NASDAQ: UPWK) is kind of a gig economy play — generally project-based or contract work — think of Uber drivers, artists, writers, and consultants. Upwork, specifically, is a freelance technology platform that connects professionals with prospective short and long term, particularly in business, design, and tech.

Upwork acts as the intermediary; it connects jobseekers with options, acts as a talent scout for employers, and fulfills contracting and payment. For providing its service, Upwork takes a 20% cut on assignments less than $500, a 10% cut on $500 – $10,000 objectives, and a 5% cut on $10,000+ jobs.

Considering ‘The Great Resignation’ and the adoption of a remote working lifestyle, convenient and flexible work conditions are more important than ever. The number of professionals turning to freelancing is also increasing, going from 50% of total freelancers last year, to 53% this year, so it’s definitely one to watch. 

Lemonade

Last, but not least: Lemonade (NYSE: LMND). You’ve heard of FinTech, now we’ve got the next prodigy, InsureTech. Lemonade is a mobile-only insurance app that uses artificial intelligence and machine learning algorithms to set up your policy — just a couple of quick details, and you can be insured in minutes. Currently, it offers renters, homeowners, life, and pet insurance, and just recently launched Lemonade Car.

For mobile-native millennials and Gen-Z’ers, this is a hassle-free solution compared to going through the standard rigmarole with insurers. It has targeted this audience from the beginning, with its first product being renter’s insurance, in the hope that it can keep them as lifetime customers as their needs grow. When it comes to making a claim too, the payout can be approved not in months, but seconds!

Additionally, it increased its number of customers by 45% YoY to 1.36 million, grew premium per customer 24% YoY to $254, increased total revenues 101% YoY, and in force premiums have grown 84% from the same period in the prior year.

Lemonade made its public debut in July 2020, a period of hyper-speculation among tech and growth stocks that saw the company’s valuation almost triple from its IPO. And so, it came crashing down. In that same period, it has launched car insurance and acquired Metromile, a pay-per-mile insurer operating in eight U.S. states, so it could be a good entry point for interested investors.

Conclusion

While it may not be considered wise to put a large portion of your portfolio in small-cap stocks, you can dedicate a percentage you’re comfortable with to try to hit a home run by finding great companies that are disrupting industries.

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