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Small-cap telecom stocks offer the potential to outperform industry giants and now might be a good time for investors to look beyond the biggest names.
The tendency for small-cap telecom stocks to grow faster than large ones is a big driver of stock prices, since its simply more practical for a small company to grow exponentially. Every company with a $100 billion market capitalization first began a $10 million company, and smaller stocks often can adjust to changing business conditions better than bigger ones that have a heftier existing market share.
The small stocks with modest market share also can find growth opportunities in subsectors that have yet to mature into behemoth industries. In contrast, a mega-cap company like Amazon.com (NASDAQ:AMZN) already has captured massive market share, so it is difficult for its management to sustain revenue growth because of the company’s immense size and need to defend its existing market share. The same challenge exists for all large-cap stocks.
However, that historical outperformance of small-cap stocks has been missing in action in recent years. For the last five years, the S&P 500 is up 58.7 percent, while the small-cap Russell 2000 has risen only 40.2 percent.
Chart courtesy of stockcharts.com
Chart courtesy of stockcharts.com
Assessing Which Small-Cap Stocks Offer the Most Potential
The current bull market has been built on the larger companies reaching new highs, with small caps getting left behind. There is plenty of speculation about why this is happening. Perhaps the mood of the market is inclined toward stability these days, or the economy and tax laws have shifted to favor larger corporations. Surely the truth is a combination of several factors. But whether the small-cap advantage ever will rematerialize is hard to say.
Telecom is an industry without a great number of small-cap stocks, and for good reason; the major telecoms benefit immensely from economies of scale, and there are plenty of barriers to entry. But there are a few publicly traded companies eking out an existence in telecommunications. Let’s examine a few small-cap telecom stocks for an anecdotal look inside the space.
Shenandoah Telecom, or Shentel (NASDAQ:SHEN), is a wireless, cable, Internet and wired connection provider serving consumers and businesses operating in the east central United States, including Kentucky and West Virginia, among other states. It operates partly under the Sprint (S) brand, which may have been a mixed bag for the company.
Is Shenandoah Telecom Among Small-Cap Stocks Offering Sufficient Potential for Investors?
“Shenandoah was expanding at a reasonable rate until growth flattened out early this year,” said Hilary Kramer, whose investment advisory services include Turbo Trader, High Octane Trader and Value Authority.
As the chart below shows, that disappointing growth may have impacted the stock’s price, as it struggled through 2019.
Chart courtesy of stockcharts.com
“While a dispute with Sprint has been a cloud on the long-term picture for years, I’m looking for the looming merger with T-Mobile to smooth the path to a resolution there at last,” said Kramer, who also heads the GameChangers investment advisory service. “In that scenario, this stock could become interesting.”
Personally, I concur that this chart does not resemble that of a stock I would buy right now. Although the recent uptrend on higher volume seems promising, the longer-term downtrend raises big concerns for me. It’s hard to justify investing in a company like this today when there are so many stocks out there not in recovery mode.
Shenandoah is a larger small-cap, with its $2 billion market cap putting it at the very high end of the definition of the term.
Small-Cap Stocks Offering Potential Include Sonim Technlogies
A much smaller company that entered the scene far more recently is Sonim Technologies (NASDAQ:SONM), a maker of heavy-duty smartphones targeted at professionals in industries that include utilities, manufacturing and construction.
This tiny company qualifies as a micro-cap stock, with a capitalization of just $75 million. One could reasonably expect that this means an amplification of all the traditional wisdom about small-cap stocks. SONM has tons of room to grow its market, but also has room to make potentially devastating errors. Naturally, this also means it would be relatively trivial for big companies to acquire.
“It’s a niche business now, barely generating $125 million a year in revenue, and I am not looking for a lot of growth in 2020,” Kramer commented. “The longer term is a very different story, though.”
The Sonim XP line of phones aims to resist damage from drops, water damage, dust, weather and even harsh chemicals. The company also offers industrial-grade phone accessories. There is some longer-term hope on the horizon for Sonim’s prospects in the current market landscape, however.
Sonim could become a key player in the internet of Things, where tough little devices need to travel into places human beings can’t easily go.
“If I’m right, sales here will double between now and 2023 and this tiny company will be deeply profitable,” Kramer said.
AT&T Is Among the Partners Sonim is Using as a Small-Cap Stock to Unlock Its Potential
Sonim is partnered with AT&T (NYSE:T), among other companies, for North American distribution and also offers its products in Europe and Australia.
The performance of SONM since its May 2019 initial public offering (IPO) has been dismal. Opening around $11, the share price plunged under $3 before finally starting to recover under the guidance of a new CEO in November. The stock now trades near $4 but the company has yet to meet its earnings expectations. Clearly, this is rocky territory for Sonim, but perhaps its recovery will continue.
Chart courtesy of stockcharts.com
“I’ve had my eye on the IPO market lately and think Sonim Technologies (SONM) may be worth picking up at these distressed levels,” Hilary Kramer commented. “The stock got caught in the backlash around Uber’s bungled debut… they went public on the same day, but the companies are very different. In the meantime, the IPO backlash means you can buy in at under 0.3X revenue and 0.7X tangible book value. That’s a deep discount for the brave with two years to wait.”
It certainly is true that this stock is only for brave investors right now, but it is those tough calls that can generate the most shocking big green numbers on a trader’s screen.
Small-Cap Stocks Offering Potential Include Cambium Networks Corporation
Another very small recent IPO in the telecom space is Cambium Networks Corporation (NASDAQ:CMBM). Cambium went public in June 2019 at $12 and now trades around $8.50, having managed a 40%+ bounce in the past month.
This company is a provider of Wi-Fi infrastructure and network solutions for all sorts of settings, primarily serving enterprises and governments and operating all over the world.
“I would not buy the other telecom IPO of the year, Cambium Networks (CMBM), until I see bigger orders for its wi-fi service start coming in,” Kramer said. “Right now, it just isn’t far enough along to be worth drawing to my IPO Edge subscribers’ attention.
“While management has built a viable platform, it’s going to take a little more effort for this company to break even. When you’ve only got $19 million in post-IPO cash balanced against $65 million in debt, I want a slightly stronger track record of positive cash flow. Otherwise, if anything goes wrong, it goes catastrophically wrong.”
Chart courtesy of stockcharts.com
As for the rest of the small-cap telecom category, Kramer commented, “beyond these names, we have to go overseas to get really interesting small-cap telecom opportunities. I wouldn’t push any buttons there until I see how the trade war shakes out. The global economic map is changing fast. We want to make sure we’re on the right side, especially in a relatively slow-moving and asset-intensive industry like telecommunications.”
I would hesitate to recommend any stocks in this space right now, but perhaps determined investors and industry aficionados are made of sterner stuff. Still, this provides some interesting insight into an industry that is not known for its tiny public companies offering much potential for big gains, unlike more flavor-of-the-moment sectors such as biotech. Small-cap stocks exist in just about every industry, and the next big thing must start somewhere.
Tyler Higgins is the Assistant Editor of Eagle Financial Publications.
