The Motley Fool has highlighted three small-cap stocks that could “trounce” the S&P 500 over the next five years. Each of the companies offers major growth potential and could deliver substantial returns. However, the Motley Fool cautions, they may not be suitable for every investor.
The Honest Company
The Honest Company, which makes hygiene and skincare products such as wipes, diapers, and personal care items, is focused on environmental responsibility and safety. For the second quarter of 2024, the company reported a 10% year-over-year bump in revenue to $93 million, a gross margin increase of 11.2 percentage points to 38.3%, and a near-threefold reduction in the net loss to $4 million. The performance allowed Honest to revise its 2024 full-year revenue growth forecast upward from “low-to-mid” single digits to “mid-to-high” single digits.
Honest’s share price has surged almost 256% over the last 12 months, yet its current market cap of $395 million (as of Tuesday, October 29) is still considered “conservative” by the Motley Fool, which points to the company’s established position in the multi-billion-dollar clean consumer goods market.
According to MarketWatch, eight analysts currently cover Honest, with six of them rating the stock as a “buy” and two a “hold.” Their average target price is $5.39 per share, for upside of over 36% versus the last closing price.
Poet Technologies
Poet Technologies has developed a platform that enables seamless integration of electronic and photonic devices into a single chip. This is a solution useful for any device or system incorporating electronics and photonics, including AI and the Internet of Things.
Since the beginning of the year, Poet stock is up 303%, partly driven by strategic partnerships, the Motley Fool explains. Recently, the company announced an agreement with Mitsubishi Electric to codevelop integrated optical engine chipsets for 3.2T pluggable transceivers, which are in high demand for optical communications in the rapidly growing AI networks market.
That said, Poet Technologies is still in the early stages of commercialization, faces stiff competition from established players in the optical components market, and requires substantial capital to scale operations, the Motley Fool points out. According to MarketWatch, the lone analyst covering Poet recommends buying the stock amid a target price of $4.94 per share, approximately 30% above its current price.
Applied Digital
Applied Digital builds and operates next-generation digital infrastructure that the company says meets the needs of high-performance computing apps, including AI and machine learning. Its data centers are scalable, utilize liquid-cooling systems, and are located near renewable energy sources, which makes them more cost-effective and environmentally friendly.
In the fiscal-2025 first quarter (ended August 31), Applied’s revenue was up 67% versus the previous-year period to $60.7 million. The company recently completed a $160 million private placement, with investors including Nvidia, the Motley Fool notes. However, it adds, there are execution risks: Applied will need significant capital investment to build out planned infrastructure, while competition in high-performance computing continues to intensify.
All seven analysts tracking the company, according to MarketWatch, have a “buy” recommendation, with an average target price of $10.71 per share, indicating 36% upside versus the latest closing price.
For investors
According to the Motley Fool, each of these three companies may offer higher potential returns than their larger counterparts. However, they come with greater price volatility and business execution risks. The Motley Fool advises investors to carefully size their positions within a well-diversified portfolio. In its view, all three stocks are better suited for investors who can tolerate higher risk levels and maintain a long-term perspective.
