Investing in Small Companies: The Top 4 Small-cap Stocks to Watch in 2022

Posted on 16th February 2022

Maxim Manturov, Head of Investment Research at Freedom Finance Europe, explores the growing popularity of small-cap stocks and the top stocks to watch in 2022

Investing in small companies can be a good decision. Despite their size, certain organisations will punch above their weight and generate substantial returns.

However, investors looking to capitalise on small-cap stocks should be aware that this type of investment often comes with risk. For example, smaller companies tend to trade less frequently than bigger corporations, meaning shares can be difficult to sell.

With this in mind, Maxim delves deeper into the rising popularity of small-cap stocks and why traders should do their research before choosing to invest. He also sheds light on some of the leading small-cap stocks that are likely to gain traction this year.

What are small-cap stocks?

Small-cap stocks are shares of a company with a total market value between £300m and £2bn. Like larger market players, investing in a smaller organisation can have substantial growth prospects. However, they tend to offer returns in the long term, as right now they lack the resources of larger-cap companies.

This can make them more vulnerable to bearish sentiment amongst investors, as well as negative developments. These vulnerabilities, in turn, can increase the volatility of a small-cap business. Investments in such companies are particularly risky during an economic downturn, as issuers are unprepared for sharply falling market demand.

It is therefore imperative for any investor looking to buy shares in a smaller organisation to do their research and diversify their investments wisely. Small-cap stocks are definitely something to consider, but they should not make up your entire portfolio.

The top 4 small-cap stocks to watch

1. PDC Energy (PDCE) is an independent oil and gas producer that is developing the Wattenberg field (Colorado) and the Delaware Basin (Texas). In 2021, crude oil prices posted their biggest annual gain since 2009 and the sector continues to recover in 2022. S&P Global Market Intelligence said PDC Energy received a strong buy consensus recommendation from 15 Wall Street analysts.

The average target price for PDC Energy stock is £60.7 (about 41% up). Market participants are positive about the asset base of this small-cap company, as well as its ability to generate FCF well above its weighting.

2. Tenable Holdings (TENB) develops software for the new cybersecurity category, Cyber Exposure. Tenable is changing the way we think about data protection by providing customers with information about the surface of a possible attack. In doing so, vulnerabilities extend not only to the servers and infrastructure of a typical corporate network, but also to assets such as cloud infrastructure, Internet of Things (IoT) devices and operating technology (OT), including industrial control systems.

A holistic approach to cybersecurity will help the company’s customers make effective strategic decisions in this area, as well as prevent and remediate threats. Tenable Holdings has an average target price of £58.8 (about 57% upside).

3. Coinbase (COIN) is a cryptocurrency exchange that is more of a mid-cap company. It makes sense to bet on it in the long term due to the fact that blockchain technology deserves approval. In the short term, however, Coinbase Global stock is one such asset that is currently ‘suffering’, despite the fact that it is the largest digital asset platform in North America.

An investment in Coinbase can serve as a kind of diversification investment in the digital economy. In other words, if digital assets remain, COIN stock is a reasonable passive bet on the cryptocurrency market as a whole. The average target price for Coinbase stock is £294 (about 93% up).

4. DigitalOcean (DOCN) is a US-based open source cloud infrastructure provider. The company shows steady earnings growth: for the first three quarters of 2021, DigitalOcean’s revenues almost equalled those for 2020. Plus, DOCN’s operating cash flow is growing rapidly, while its losses are decreasing at a substantial rate.

DigitalOcean now has a global network of 8 data centres located in major data centres, including Frankfurt, Bangalore, New York and San Francisco. The provider is positioned to be easy to use, unlike competitors such as Amazon Web Services from Amazon. The average target price for DigitalOcean shares is £92.4 (about 107% up).