The markets are trending positive, after an earnings season that was less grim than predicted. With a majority of S&P listed companies having reported Q2 results, the fall-off in profits was not as bad as expected. On average, earnings are down 36%, a favorable comparison to the expected 44% declines. Even better, close to 85% of reporting have beaten the forecasts. This is an all-time high percentage, and a great sign of economic health despite the corona virus crisis.
The better-than-expected earnings season is having a ripple effect in the stock markets. The S&P 500 and the NASDAQ indexes are both closing in on their own record levels, and are their trend lines are clearly positive.
Looking at overall market conditions for investment firm Canaccord, equity strategist Toney Dwyer writes of the prospect for continued stock gains: “We believe the combination of a solid economic backdrop, historically high business and consumer confidence, and better-than-expected earnings growth continues to suggest there is a long way to go.”
Using Dwyer’s strategy to provide concrete recommendations, Canaccord’s top analysts have honed in on three small-caps, stocks with market caps of less than $400 million, poised to post big gains in the coming months. After running the tickers through TipRanks’ database, it’s clear the names are also getting support from the rest of the Street.
Spark Networks (LOV)
We’ll start with a tech company. Spark is an online dating company, formed three years ago, and holding a portfolio of recognizable brand names, including SilverSingles, Christian Mingle, and Jdate. Closing out last year, Spark reported 44% year-over-year revenue gains, with total sales of 149 million Euro for the year. Total site registrations increased 72% in 2H19, and cash flow from operations, for all of 2019, grew 92% year-over-year.
The company will be reporting 1H20 fiscal results on August 27 – and the preliminary results are congruent with overall conditions during the ‘corona half.’ Total revenues are predicted declining to 103.4 million Euro for the half – a figure which, if met, will be significantly higher than the 94 million Euro expected.
Covering the stock for Canaccord, analyst Austin Moldow writes of Spark’s recent performance: “The company was able to benefit from the industry wide increases in engagement and subscriptions. In addition to this dynamic, several product and marketing improvements to Zoosk immediately made an impact and led to the better-than-expected revenue result. The raised guidance was also due to better visibility after operating through several months of the pandemic.”
To this end, Moldow rates LOV shares a Buy, and his $19 price target suggests a powerful 252% upside potential for the coming year. (To watch Moldow’s track record, click here)
Overall, the analyst consensus rating on Spark Networks is a Moderate Buy, based on 2 recent ‘thumbs up’ reviews. The stock is selling for $5.40 and has an average price target of $13.25; this implies room for an impressive 144.5% upside. (See LOV stock analysis on TipRanks)
Digi International, Inc. (DGII)
The next Canaccord recommendation on today’s list is an IoT innovator. Digi International develops routers, modems, and remote managers for networking and IoT systems. Digi’s product line has been expanding to include 5G cellular-based wireless connectivity, an urgent capability as the network technology expands.
A look at Digi’s quarterly earnings over time shows a pattern – a strong calendar third quarter, followed by a falling off in fourth through second quarters. The economic downturn in 1H20 came during Digi’s natural low quarters – that, combined with the company’s solid product line in wireless connectivity, a segment that only grew in importance as millions of workers migrated to remote work, helped to insulate Digi from the recessionary pressures of the corona crisis.
Indeed, the company managed to report robust fiscal third-quarter numbers that smashed expectations out of the water. EPS beat expectations, coming in at 6 cents profit instead of the forecast 1 penny loss. The company also took measures to protect liquidity during the quarter, successfully paying down $30 million in debt. Revenue for the quarter grew 15% to $70.3 million.
5-star analyst Michael Walkley is impressed by Digi’s performance, and by management’s forward-looking plans. In his recent note, Walkley writes, “While we anticipate the challenging macro trend will extend well into F2021 due to disruptions from the global pandemic, we are impressed with management’s execution on cost controls and cash generation and anticipate the company will generate solid adjusted EBITDA margins with positive cash flow… With Digi’s improved IoT focus and execution to drive a simplified product offering with stronger revenue growth and adjusted EBITDA margins longer term, we believe the shares represent an attractive opportunity…”
Walkley backs his words with a Buy rating, and his $24 price target implies a robust 78% upside for the stock. (To watch Walkley’s track record, click here)
Wall Street is broadly in agreement with this analysis. Over the last couple of months, DGII has received nothing but “buy” ratings from Street analysts. Meanwhile, with an average price target of $20.25, a 50% upside could be in store. (See DGII stock analysis on TipRanks)
Blue Apron Holdings (APRN)
The last stock on our list is a holding company. Through its subsidiaries, Blue Apron offers meal-kit delivery services, a subscription service that sends the end-use customer a one-week package of food, containing recipes and locally sourced, portion-controlled ingredients. Meal kits are a growing industry, becoming more popular in urban areas where people are increasingly distanced from the sources of the foods they eat.
The quarterly results show that Blue Apron – specializing in meal kit deliveries – was able to turn the social lockdown policies put in place against corona to its advantage. Q2 was the company’s first profitable quarter in the last two years, and saw strong improvement in several key metrics. Net revenue increased 10% yoy to $131 million, the customer base grew by 20,000, and the average revenue per customer grew 25% yoy, reaching $331. The company saw free cash flow of $14.4 million in the quarter.
Canaccord analyst Maria Ripps sees plenty of potential here. The 5-star analyst writes, “APRN shares more recently have been reflecting improving fundamental performance… More recently, APRN stock has been consolidating and is down following a Q2 report that displayed ongoing momentum and operating improvements. With an undemanding valuation and a model returning to a growth footing for the first time in years, we find the risk/reward profile compelling…”
Ripps puts an $18 price target behind her Buy rating, implying an upside potential of 111% for APRN. (To watch Ripps’ track record, click here)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.