Growth stocks have been excellent performers during the COVID-19-pandemic-driven recession and will likely continue to be so even in the eventual economic recovery. When the economy began to emerge from the recession and started growing again, small-cap stocks responded to the positive environment quicker and grew faster than large-cap stocks. This is evidenced by the iShares Russell 2000 Growth ETF’s (IWO) 50.2% returns over the past year versus the S&P 500’s 16.6% gains over the same period.
Small-cap companies experienced a surge in demand for their products and services amid the pandemic and digital revolution tied to remote working. This is likely to continue in the future. Industries such as e-commerce, telemedicine, software applications and communication, which were some of the most obvious beneficiaries of a stay-at-home culture, were already in play in the pre-pandemic world. But the COVID-19-induced acceleration cleared the market of companies that may have been unprepared or unwilling to adapt to the changes, thereby creating greater shelf space for ‘survivors within these industries.
Investors that are concerned about these stocks’ the lofty valuations should remember that the valuation of a company is derived from discounting future cash flows. Hence, small-cap companies like QAD Inc. (QADA), A10 Networks, Inc. (ATEN) and Alpha Pro Tech, Ltd. (APT) that have the ability to generate significant cash flows in the future deserve to trade at a higher multiple. So, it’s worth paying the premium.
QAD Inc. (QADA)
QADA provides cloud-based enterprise software solutions to global manufacturing companies in the automotive, life sciences, consumer products, food and beverage, high technology and industrial products industries. The company’s services include customer and service management, manufacturing, enterprise asset management, supply chain execution, financial solutions, demand and supply chain planning and business intelligence.
In January, QADA announced that it had completed the acquisition of a German-based strategic sourcing and supplier management solution provider, Allocation Network GmbH. The strategic acquisition should play a key role in QADA’s cloud growth initiatives as well as strengthen its overall product offerings.
QADA’s EBITDA has increased at a CAGR of 9.5% over the past three years, while its levered free cash flow rose at a CAGR of 6.3% over the same period.
The company’s investment in sales and marketing has paid off well because it witnessed sustained improvement in its bottom-line performance. QADA’s subscription revenues have increased 23.5% year-over-year to $33.76 million in the fiscal third quarter ended October 31, 2020. Its adjusted EBITDA has increased 62% from the year-ago value to $9.21 million, while its EPS improved 1500% over the three-month period to $0.16.
Analysts expect QADA’s EPS to rise at a CAGR of 10% over the next five years. A consensus EPS estimate of $0.21 in the current quarter (ending January 31) represents a 90.9% rise from its year-ago value. The company has an impressive earnings surprise history; it beat the Street’s EPS estimates in three of the trailing four quarters. QADA has gained 39.2% over the past year.
QADA’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which equates to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.
QADA has an A grade of for Growth and Quality, and B grade for Stability. In the 107-stock Software - Application Industry, it is ranked #15.
In total, we rate QADA on eight different levels. Beyond what we stated above, we have also given QADA grades for Momentum, Value and Sentiment. Get all QADA’s ratings here.
A10 Networks, Inc. (ATEN)
ATEN provides secure application services and solutions for on-premises, multi-cloud and edge-cloud environments on a large scale. The company’s customers include cloud providers, web-scale companies, service providers, government organizations and enterprises. Its products are available in a range of form factors, such as optimized hardware appliances, bare metal software, virtual appliances and cloud-native software.
ATEN’s total assets have increased at a CAGR of 9% over the past three years, while its levered free cash flow rose at a CAGR of 54.9% over the same period. The company’s impressive track record positions it well to emerge as a leading player in the software applications industry.
The company was well-equipped to mitigate disruptions caused by the pandemic and continued to manage its operations effectively. ATEN’s revenues have increased 3.9% year-over-year to $62.66 million in the fourth quarter ended December 31, 2020. Its adjusted EBITDA has increased 6.1% from its year-ago value to $16.15 million, while its non-GAAP EPS improved 80% over the three-month period to $0.18.
Its operational and commercial dominance provides ATEN with the ability to further build upon its recurring revenue by taking into consideration customer preferences and business priorities. Analysts expect ATEN’s revenues to rise 6.2% year-over-year to $57.08 million in the current quarter ending March 31, 2021. A consensus EPS estimate of $0.11 in the current quarter represents a 120% rise from the year-ago value. ATEN has an impressive earnings surprise history; it beat the Street’s EPS estimates in each of trailing four quarters. The stock has gained 34.8% over the past year.
It’s no surprise that ATEN has an overall rating of A which equates to Strong Buy in our POWR Ratings system. ATEN has a B grade for both Growth and Value, and an A grade for Quality. In the 57-stock, B-rated Technology - Communication/Networking Industry, it is ranked #3.
Click here to see the additional POWR Ratings for ATEN (Momentum, Stability and Sentiment).
Alpha Pro Tech, Ltd. (APT)
Based in Canada, APT is engaged in developing, manufacturing and marketing a line of disposable protective apparel and infection control products for the cleanroom, industrial, pharmaceutical, medical and dental markets. The Company’s products are grouped into three segments: Building Supply, Disposable Protective Apparel, and Infection Control.
APT’s revenue has increased at a CAGR of 24.4% over the past three years, while its total assets rose at a CAGR of 23.2% over the same period. This reflects the company’s strong growth potential.
The company experienced a significant surge in customer demand for its personal protective equipment (PPE) products, specifically face masks, and its proprietary N-95 Particulate Respirator. APT’s net sales have increased 150% year-over-year to $30.02 million in the third quarter ended September 30, 2020. Its income from operations has increased 1044.6% from the year-ago value to $10.37 million, yielding an operating margin of 34.5%. Its net income has increased 1755.1% over the three-month period to $8.11 million, yielding an EPS of $0.60, up 1900% year-over-year.
Analysts expect APT’s revenues to rise 40.5% year-to-year to $142.91 million in the fiscal 2021 (ending December 31). Analysts expect its EPS to rise at a CAGR of 15% over the next five years. A consensus EPS estimate of $2.49 in the current year represents a 39.1% rise from the year-ago value. The stock has gained 269.4% over the past year.
APT’s POWR Ratings reflect this promising outlook. The stock has an overall rating of B, which equates to Buy in our rating system. APT has an A grade for Growth and Quality. It is currently ranked #45 of 90 stocks in the B-rated Industrial - Equipment Industry. Click here to see the additional POWR Ratings for APT (Value, Momentum, Stability, and Sentiment).
The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.
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QADA shares . Year-to-date, QADA has gained 12.55%, versus a 5.02% rise in the benchmark S&P 500 index during the same period.
About the Author: Rishab Dugar
Rishab is a financial journalist and investment analyst. His investment approach is to focus on quality stocks, trading at low prices, with business models that he readily understands.
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