3 small cap stocks to buy if the stock market collapses

COVID-19 and the response to stop its spread has been a game-changer for many businesses. It’s still early days, but the mass migration to anything digital already underway has had a huge boost and is reshape society. Since the economic lockdown in late March and early April, I’ve been trying to uncover small but promising digital businesses that could benefit.

The market has rebounded more than 40% from lows at the end of March, although the world is still a mess. So I have adopted a more cautious buying tone for now, but if stocks take a further pullback (arbitrarily defined as a 10% or more decline from current prices) this summer or fall, I will jump to head first again.

Three actions at the top of my list are Baozun (NASDAQ: BZUN), American software (NASDAQ: AMSWA), and LiveRamp Holdings (NYSE: RAMP). Let’s find out a little more about these three small cap stocks.

Image source: Getty Images.

1. Baozun: Chinese e-commerce is doing well

After rising nearly 300% in the stock price from early 2016 to late 2017, Baozun stock has had a wild ride that has ended almost nowhere since. The trade war between the United States and China, decelerating profit growth and the outbreak of the pandemic have all taken their toll.

But the company has again shown signs of life, and the stock has rebounded nearly 60% since the end of March. Baozun mainly partners with big suppliers (like Nike, Nintendo, and parent of Burger King International restaurant brands) to help them in product distribution and online sales management, and integrates with Chinese marketplaces like Ali Baba. The company is often compared to its North American counterpart Shopify.

While things are uncertain for the 2020 launch, e-commerce has proven to be incredibly resilient in the world’s most populous country. Baozun’s revenue grew 18% year-on-year in the first quarter and is expected to grow another 20% to 23% in the second. The total number of partner brands increased 20% to 239. Indeed, some US retailers and manufacturers have struggled in the US, but report that China remains a growing market during the current crisis. This bodes well for Baozun’s operations.

I’ve been a Baozun for a long time, but never really managed to pull the trigger when making a purchase. It’s valued at just $ 2.5 billion and stocks are trading for a low 2.1 times over 12 months, a real boon for a growing company. The haircut reflects risks, including a possible warming of the trade war and possible delisting of Chinese stocks US trade, but these appear to be surmountable challenges and e-commerce remains a huge opportunity in China.

2. American Software: the massive logistical problem

Consumers have been demanding delivery of their purchases on their terms for some time now, but the massive shift to e-commerce in recent months has the potential to render established logistics networks for manufacturers and retailers obsolete. Demand for direct-to-consumer shipping therefore presents new challenges, but also great opportunities.

this is where I think American software could come into play. The company makes supply chain management software (including Logility and NGC), and although it has been around for some time, it has made slow but steady progress over the past decade. . Stocks have risen 200% in the past 10 years, but the market cap is only $ 516 million as of this writing. Although it competes with other planning software like Anaplan and other large enterprise software companies like Oracle, this small company could have a lot of room to carve out a bigger market share in the years to come.

American Software transitioned to a cloud-based subscription revenue business model, which was primarily responsible for the 6% revenue increase in fiscal 2020 (the 12 months ended April 30, 2020) to $ 116 million. However, the company’s fourth quarter revenue (during the peak of economic containment) increased 11% from a year ago, due to a 53% increase in the annual value of contracts. cloud. With many organizations needing to manage their inventory in the digital age, there is a good chance that its most recent rate of progress will be sustained.

At the end of April, American Software had $ 94.7 million in cash and cash equivalents and no debt. Stocks trade for 23 times free cash flow (income minus operating expenses and capital expenses). It’s not exactly a screaming deal, but it’s more than worth watching closely as the pandemic continues to reshape the global economy.

3. LiveRamp Holdings: a data neutral third party

Digital data has been a hot commodity this year, as have privacy concerns surrounding the use of information and the purchasing habits of individual consumers. My last choice is therefore LiveRamp, a new stock that I have recovered in early July, but would be more than happy to buy more if the market decided to go haywire again.

LiveRamp acts as a third-party consumer data pool for a growing list of partner businesses and advertisers, from online businesses to physical stores. Since it does not compete with its partners, it can act as a reliable aggregator of customer information and anonymizes the data so that consumers’ information is not linked to their personal behavior. Like American Software, it has also made slow (but steady) progress, with the share price rising over 200% over the past decade. I think the intersection of digital data anonymity and its non-competing adware actually convincing service for its customers.

Total revenue increased 33% in fiscal 2020, including a 35% increase in the fourth quarter (quarter ended March 2020). The company said its financial results were negatively affected by the spread of COVID-19, and it expects revenue for the first quarter of its new fiscal year to grow only 7%. The problem is that many physical stores have been forced to close and remain limited in scope, but at some point conditions will normalize. In the meantime, LiveRamp continues to add new customers (780 at the end of March, a 17% increase from 2019), and it only serves 22% of the Fortune 500 (the largest companies in the United States). expansion here.

LiveRamp has $ 718 million in cash and cash equivalents and no debt on its books, putting it in good shape to weather the storm and prepare for a return to high growth as the effects of the recession wear off. . With a market cap of just $ 3 billion and stocks up to 8.2 times sales over 12 months, this technologist is worth doing some additional research in anticipation of another possible market downturn this year.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

About Nell Love

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