This was another wild week for investors, and the Janet Yellen promise to not raise interest rates immediately or too fast was all the markets needed to end on a strong note. Investors keep buying every dip, a trend that is now set for about three of the past years in this six-year-old bull market. 24/7 Wall St. reviews dozens of analyst reports each morning and afternoon of the week to find hidden gems for its readers.
Some of these analyst calls cover stocks to buy and some cover stocks to sell. Where we often find true hidden gems, or perhaps unknown stocks, is in those analyst reports covering small-cap stocks and in shares trading at prices under $10.
Investors generally see upside calls of 10% or 20% on Dow or S&P 500 stocks, but they often get to see analysts make upside calls with projections of 50%, 100% or even exponential growth in small-cap and low-priced stocks. With that in mind, investors absolutely positively cannot ignore the fact that these stocks are generally far riskier than Dow or S&P 500 stocks.
Also keep in mind that not all these projections come to fruition. To prove a point, some of this week’s calls feel like “all or none” outlooks — and some of these companies can even flop or disappear in time. Investors often get very excited about upside calls of 50% or more. Still, they need to understand the risky nature of small-cap or low-priced stocks.
A common mistake in evaluating small caps and low-priced stocks is the belief that they eventually grow into huge companies. That notion is a fallacy in many cases, maybe even in most cases. Generally speaking, low-priced or small-cap stocks are inappropriate for conservative investors — even for moderately conservative investors.
This past week we tracked 11 key analyst calls in stocks that were under $10 where analysts were predicting colossal upside.
Black Diamond Inc. (NASDAQ: BDE) had a strong week, and some of the upside seems to have been taken out by that rally. D.A. Davidson raised its rating to Buy from Neutral and set a $10 price target on Tuesday. The prior close of $7.05 gave an implied upside of nearly 30%. The reason for the move in the extreme sports apparel and equipment company was that it is exploring strategic alternatives. This stock ended the week just shy of $10, with a $326 million market cap and with a $6.25 to $12.60 52-week trading range.
Care.com Inc. (NYSE: CRCM) tried to rally after earnings. Its stock price also has been knocked down handily from its post-IPO levels. We did see a downgrade from J.P. Morgan, but Needham is sticking with its Buy rating. The firm lowered the target to $11 from $13 in the call, and this still implied upside of 51% from the $7.27 mid-Friday trading price. Of course investors need to consider the trajectory here, as the 52-week range is $6.50 to $18.37 — being a bull for Care.com has not yet paid off for investors.
Cerulean Pharma Inc. (NASDAQ: CERU) was above $10 on Friday, but it spent most of the week under $10. In fact, it was at $8 before the company’s financial update. Canaccord Genuity reiterated its Buy rating and $15 price target on Friday, while Leerink raised its target to $18 from $13 when it reiterated its Outperform rating.
Energous Corp. (NASDAQ: WATT) was started in new coverage by Oppenheimer this past week, and it was given a $13 price target. The company is seeking to fix the problems of wired electricity by going to wireless charging. Oppenheimer outlined the risks, but said it has a first mover advantage and does not have the same start-up risks you might see elsewhere. There is still risk as it has no revenues yet, but the call is featured here in more detail.