Up-and-coming stocks to buy are smaller companies with great business models, oodles of revenue growth, and profitability somewhere in the distant future. What are these wonderful businesses? I wish there was an easy way to find them. Maybe Inc. can someday produce a list of the up-and-coming small- and mid-cap stocks. Its annual Inc. 5000 list is always so much fun to go through.
I guess I’ll have to find seven up-and-coming stocks to buy the old-fashioned way: by searching the holdings of small- and mid-cap exchange-traded funds (ETFs).
One of the better small-cap ETFs is the Vanguard Small-Cap ETF (NYSEARCA:VB). It tracks the performance of the CRSP U.S. Small Cap Index. The ETF currently has 1,504 stocks spread amongst $37.6 billion in total net assets.
You can buy the ETF and save yourself a lot of time and aggravation, or you can read up on these seven up-and-coming stocks to buy to retire a millionaire.
|AMEH||Apollo Medical Holdings||$37.19|
|ALK||Alaska Air Group||$47.28|
|RHP||Ryman Hospitality Properties||$89.54|
|NOVA||Sunnova Energy International||$22.40|
Target Hospitality (TH)
If you were brave enough to buy Target Hospitality (NASDAQ:TH) stock in October 2020 and still hold it today, you’re sitting on an impressive 1,387% return. Year-to-date, TH stock is up 254%.
The big jump in 2022 came in July when the company upped its guidance due to an expanded domestic humanitarian aid contract with the U.S. government. Target is one of the largest providers of vertically integrated modular accommodations and value-added hospitality services in the U.S.
As a result of the contract, Target raised its financial outlook for 2022 by 53%. The agreement will provide a minimum of $390 million annually and a maximum of $575 million. The contract with the federal government raises the revenue it gets from its government business to 73% overall in 2022.
For all of 2022, it expects revenue of $505 million and adjusted EBITDA of $300 million at the midpoint of its guidance.
Despite the significant gains in 2022, Target trades at 3.1x its expected sales for the year and 4.2x adjusted EBITDA. Those are both very low for a company with 99% of its revenue under contract for 2022.
However, one big caveat to investing in Target Hospitality: it owns the South Texas Family Residential Center, which is a 2,556-bed facility for asylum seekers.
PDC Energy (PDCE)
In 2022, I’ve written about PDC Energy (NASDAQ:PDCE) on several occasions. I suggested readers look at the oil and gas company in mid-July because it traded at a discount to its free cash flow.
PDC generates most of its revenue from wells operating in Colorado’s Wattenberg Field, with the rest from wells in the Delaware Basin in West Texas. At the time of the aforementioned article, it had an FCF yield of 17.6% — anything above 8% is value territory — while its price-to-cash-flow was significantly less than in 2014 when oil prices last traded at $100.
On Nov. 2, it reported its third-quarter 2022 results. In the quarter, it produced 23 million barrels of oil equivalent or 250,000 barrels of oil equivalent per day. Its revenues in the quarter were $1.51 billion, 211% higher than a year earlier. Its net income was $798 million, 449% higher than a year ago.
Its adjusted free cash flow in the quarter was $440 million, up from $404 million in Q2 2022. Its trailing 12-month free cash flow is $1.66 billion. Based on a market capitalization of $7.1 billion, it has an FCF yield of 23.3%, even higher than in July, despite its stock gaining 36% in the four months since. It’s a keeper.
BRP Group (BRP)
BRP Group (NASDAQ:BRP) is better known as Baldwin Risk Partners, an insurance broker based in Tampa. It provides insurance and risk management solutions to more than 900,000 clients in the U.S. and elsewhere from 120 offices in 20 states.
Part of its business model is to work with more than 3,500 independent insurance agents who generate business on behalf of the company’s Guided Medicare business. In addition to its Medicare business, it has three other reportable segments: Middle Market, Specialty and MainStreet.
The other part of its business model is using partnership acquisitions to add premium revenue. In 2021, it completed 16 partnerships, paying $1.1 billion for those acquisitions. The partnerships added $121.4 million in premiums. In 2020, it paid $1 billion for 16 partnerships.
In the nine months ended Sept. 30, it acquired three partnerships for $415.4 million. Those acquisitions added $4.4 million in premiums.
Through the third quarter, it generated $735 million in revenue (80% higher than a year earlier) and $104.5 million in adjusted net income (51% higher YOY).
It is profitable and growing.
Apollo Medical Holdings (AMEH)
Apollo Medical Holdings (NASDAQ:AMEH) operates a technology-based healthcare delivery platform that helps physicians and insurance providers deliver high-quality patient care cost-effectively.
According to its November presentation, Apollo has 1.2 million patients managed through value-based contracts through more than 10,600 contracted physicians generating $1.05 billion in trailing 12-month revenue and $132 million in adjusted EBITDA.
Apollo estimates its total addressable market is $2 trillion annually. It generates approximately 80% of its revenue from Medicare and Medicaid. Its core market is 17 California counties, with plans to expand beyond that.
Over the past four years, it’s achieved compound annual growth of 25% to 26% for revenue and 36% to 45% for adjusted EBITDA.
Only two analysts cover Apollo — one “buy” and one “overweight” rating with a $57 average target price — so you’ll want to do your due diligence before considering investing.
Healthcare is not my specialty, so I couldn’t tell you if they’re blowing smoke, but my early examination of its business suggests it’s got a significant pathway for growth over the next few years.
Alaska Air Group (ALK)
Alaska Air Group (NYSE:ALK) recently announced that it was buying 52 more Boeing 737 MAX aircraft with an option to purchase an additional 105 by 2030. “This investment secures aircraft to optimize our growth through the next decade, which we know will be a formidable competitive advantage,” Alaska Airlines CEO Ben Minicucci said in its Oct. 26 press release.
There is no question that airlines are risky investments. James Glassman recently discussed in Kiplinger some of the reasons why. Virgin Airlines founder Richard Branson once said, “If you want to be a Millionaire, start with a billion dollars and launch a new airline.”
Here’s an example of how the airline innovates. It recently announced the expansion of its flight subscription service to Salt Lake City. It is intended to attract ski buffs from warmer climates like California, Arizona, and Nevada.
“The service allows guests to book six, 12 or 24 roundtrip flights at a fixed-monthly rate. Subscribers lock in main cabin deals for a full year and pay taxes and fees when booking flights, which cost as low as $14.61 per flight,” Alaska Airlines Nov. 3 press release stated.
Think of it as dollar-cost averaging for flyers.
Ryman Hospitality Properties (RHP)
Ryman Hospitality Properties (NYSE:RHP) is a lodging and hospitality REIT (real estate investment trust) that owns five of the top 10 non-gaming convention center hotels in the U.S. However, it’s probably better known for holding a controlling stake in Opry Entertainment Group, which owns Nashville’s iconic Grand Ole Opry and Ryman Auditorium.
On Oct. 11, the company announced that long-time CEO, Colin Reed, would move into the Executive Chairman seat after more than 21 years as CEO. Not many CEOs last this long. It’s a testament to his leadership abilities. Current President Mark Fioravanti will succeed him on Jan. 1, 2023.
During Reed’s run, he completely transformed the business starting in 2001. By 2012, it was ready to be converted into a REIT. Fioravanti played a key leadership role in the REIT conversion, so it makes sense for him to succeed Reed.
An example of Reed’s success: Ryman reported Q3 2022 results on Oct. 31. Its Hospitality segment generated record quarterly revenue of $390.6 million despite a lower occupancy rate in the quarter. Overall revenues and operating income were up significantly over Q3 2021.
Its business has recovered from the pandemic. As a result, it reinstated its quarterly dividend, paying 10 cents a share with the October 2022 payment.
Six of the eight analysts covering its stock rate it “overweight” or “buy” with an average target price of $100.50, 12% higher than where it’s trading. It’s a diamond in the rough with underrated assets.
Sunnova Energy International (NOVA)
Sunnova Energy International (NYSE:NOVA) stock is down more than 48% over the past year. The Invesco Solar ETF (NYSEARCA:TAN) owns $64.8 million in Sunnova stock. The ETF holds more than 50 stocks related to the solar energy industry. It is down more than 18% over the past 52 weeks.
Investors should expect more from solar energy stocks in 2023. This includes Sunnova, a leading provider of solar power equipment and services. Founded in 2012, it has more than 245,000 customers in 40 states and territories.
Does it make money? No. It had an operating loss of $64.7 million in the nine months ended Sept. 30. But it continues to scale its business, adding 21,800 customers in the third quarter and growing revenue by 117% over a year ago.
For all of 2022, it expects to add at least 85,000 customers, with growth likely in 2023 due to consumers looking to lower their utility bills through solar energy.
Sunnova comes with the most significant risk of the stocks on this list, but it likely also has the best upside potential over the next decade due to the acceleration in solar power. I like it a lot, but it’s not for everyone.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.