The market’s been bumpy… to say the least.

But among the hardest hit have been small-cap stocks. The Russell 2000 – a fair barometer for small-capitalization companies – declined 19.4% from late November to mid-March.


That’s not entirely surprising. As I’ve shared with readers of my small-cap service, Wide Moat Confidential, small companies are, by their nature, more volatile. They have fewer years of earnings (if they have earnings at all) to fall back on. And because many finance their early years of growth, they can be more sensitive to interest-rate changes.

Everybody loves buying stocks in a bull market. Very few want to go shopping after a nearly 20% drawdown. But, of course, that’s when you can find some incredible values. If you’re willing to look closely.

Today, I’ll share a few small-capitalization companies I looked at during the course of writing this month’s issue of Wide Moat Confidential (paid-up subscribers can expect our issue today).

I’m not necessarily recommending these stocks, but they all have sturdy businesses and could deserve a closer look. In the spirit of March Madness, they are the “Cinderella Stories” of the stock market.

The Art of Choosing Small-Cap Stocks

Small-cap stocks are those which have market capitalizations between $300 million and $3 billion. These less-established, less-connected businesses face more challenges. Yet they also have greater room to grow since it’s easier to double, triple, or quadruple a billion-dollar business than a trillion-dollar business.

Better still, small caps have a much better success rate than March Madness Cinderella stories. While I believe three such NCAA underdogs have made it to the final four over the decades, there are hundreds of small-cap winners to brag about.

And I may have just found three more.

Still, a word of caution. I don’t want you to get too excited about your prospects of getting rich from small-cap stocks. They’re a great category to look at, but you should never base your entire portfolio off them.

While I don’t know your personal situation, I generally believe a portfolio should be built on a foundation of well-established, dividend-paying companies across a variety of sectors. Then, depending on your age, finances, and goals, you can add in more risky investments as you so choose…

With the proper research done.

For the record, though, that examination can be more complicated with small-cap stocks. Most of these businesses are too small for rating agencies and even news organizations to cover very often.

So if you want to find the best of the best – the companies with strong competitive advantages, stable business models, and reliable free cash flow – expect to do more work. That’s certainly the mindset I’ve adopted with my small-cap service, Wide Moat Confidential.

You also need to understand that selecting small-cap stocks is often more an art than a science. There’s less tangible data to work off since these companies haven’t been around long enough to establish solid track records. And that means figuring out valuations can be much more difficult as well.

Even so, my team and I have immersed myself in this area long enough to pick up a few tricks of the trade. It’s helped us develop a strong track record that we’re always looking to uphold.

I’ve exercised that same standard to the three small caps below…

Cinderella Story Pick No. 1: CareTrust REIT

Let’s start with CareTrust REIT (CTRE) with its $5.41 billion market cap. A health care real estate investment trust (“REIT”) based in San Clemente, California, it owns skilled nursing and assisted living facilities, as well as multiservice campuses across 32 U.S. states.

All of its properties are contracted under sturdy, stable, triple-net leases – a topic I covered on Tuesday.

It’s been a busy month for CareTrust so far. On March 11, it agreed to acquire Care REIT, a UK-based REIT with 137 care homes, for $817 million. On March 14, Deutsche Bank analyst Omotayo Okusanya upgraded it from a Hold to a Buy, raising its price target from $27 to $31.

And four days later, the REIT increased its quarterly dividend from $0.29 per share to $0.335. So it’s clearly feeling pretty confident in its future prospects, a sentiment I can’t help but share.

CareTrust is currently trading at $29.17.

Cinderella Story Pick No. 2: Orla Mining

Despite being based in Vancouver, Canada, Orla Mining (ORLA), with its $2.925 billion market cap, operates across Mexico, Panama, and Nevada. It also acquired the Musselwhite gold mine in Ontario, Canda, earlier this month.

The latter property has produced almost 6 million ounces of gold over the past 25 years… with the promise of plenty more to come. This is one of the country’s – and the world’s – largest gold mines, with an estimated reserve of 2.29 million ounces.

With the recent volatility in stocks over the political climate, gold stocks have proven to be a bright spot. And since gold miners tend to be leveraged to the price of gold, the rising gold price has been very good to many of them.

And since I don’t expect the volatility to end just yet, I see gold stocks succeeding further from here.

Orla is currently selling at $8.99.

Cinderella Story Pick No. 3: SanDisk

SanDisk (SNDK), a computer company based in Milpitas, California, with a $6.39 billion market cap, might look like it’s brand-new. But it’s actually a multinational operation that dates back to 1998.

The original business was purchased by Western Digital (WDC) in 2015… which then decided to spin the unit off in 2023, an action it just completed in February. So that’s where it stands today, still doing what it has been doing for a quarter century, making:

  • NAND (non-volatile) flash memory cards and readers

  • USB flash drives

  • Solid-state drives and digital audio players

Analyst Cantor Fitzgerald assigned SanDisk an “overweight” rating on March 7, with a price target of $60, noting its strong balance sheet and ample free-cash-flow generation. And four days prior, Morgan Stanley analyst Joseph Moore did the same… only with an $84 price target.

All the same, SanDisk has already risen an astounding 51.84% over the past four weeks. As such, a pullback would be ideal for entering a purchase.

SanDisk presently sells for $55.85.

Regards,

Brad Thomas
Editor, Wide Moat Daily

P.S. Later this week, we will launch the first episode of The Wide Moat Show on YouTube. Just like the article you’re reading now, it’s a completely free analysis for you to access and enjoy.

Every Thursday, Nick Ward and I will offer you real-time actionable ideas to help navigate the markets. As a bonus, I’ll be giving away a free copy of REITs for Dummies each episode. So make sure to check out our inaugural episode tomorrow to get all the details!

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