3 Small Caps Ready to Make a Run

With the first quarter of 2021 in the books, U.S. small cap stocks have almost doubled their return from all of last year. Gradually rising interest rates, inflation concerns, and expectations of a strong economic recovery have provided strong support to the rally.

With these tailwinds expected to persist in the coming months, some investors are looking for ways to hop on the small cap bandwagon. Here are three small but mighty stocks that look ready to make a substantial run as the second quarter gets underway.

Will Silk Road Medical Have a Better 2021?

Silk Road Medical (NASDAQ:SILK) is a California-based medical device company that specializes in helping stroke patients. It is best known for developing TransCarotid Artery Revascularization, or TCAR, a novel surgical procedure for treating carotid artery disease. The approach is designed to address blockages that can occur in the primary arteries of the neck and cause strokes.

The main catalyst for Silk Road Medical is the expectation of increased TCAR procedures this year following a year in which many elective surgeries were postponed or cancelled due to the pandemic. As more hospitals resume scheduling the surgeries, Silk Road's volume and financial figures should improve significantly. The company has done well to offer virtual training to doctors for the increasingly popular TCAR procedure during COVID-19.

Looking beyond the near-term boost from pent-up surgery demand, Silk Road Medical has growth opportunities that are based on the superior efficacy and safety profile of TCAR compared to traditional surgical procedures. Its market size would increase dramatically if it can secure additional approvals from the FDA for TCAR as a treatment for low and medium risk stroke patients rather than just for high-risk patients. And with plenty of room to expand overseas the road to long-term growth looks smooth for Silk Road Medical.

What Does Knowles Do?

Illinois-based Knowles (NYSE:KN) is a communications equipment maker whose stock has had a nice run since November. But having taken a breather in recent weeks, it may be recharging for the next leg of the rally.

The company's sweet spot is digital signal processing (DSP). In layman's terms, this is the process by which computers and other devices take an information signal (for instance, audio, video, or temperature) and put it to better use. DSP is used in a broad range of applications including radar, seismology, and mobile phone speech transmission. Knowles' acoustic and audio processing solutions are used by customers in the consumer electronics, communications, defense, medical, industrial, and automotive end markets.

Knowles' earnings are forecast to recovery sharply this year largely due to surging demand for its micro-electro-mechanical systems, or MEMS which are used in the treatment of hearing loss. It is a leader in the MEMS microphone business that serves not only the hearing health market, but the mobile device and Internet-of-Things (IoT) markets.

As we continue to use spoken commands to interact with technology, such as Amazon Echo and Google Home devices, demand for Knowles microphone and audio solutions is expected to strengthen. The aging demographic theme also makes it a solid play for the hearing business. Coming off a convincing fourth-quarter earnings beat, Knowles is well-positioned for a strong first quarter report. Investors may want to keep their ears to the ground on this stock.

Is Magnolia Oil & Gas a Good Energy Stock?

The energy sector is where we find our next small-cap stock, Magnolia Oil & Gas (NYSE:MGY). Headquartered in Houston, the company is an interesting play on the energy rebound theme.

The oil and gas producer owns assets spanning some 463,500 acres in the Eagle Ford and Austin Chalk areas of southern Texas. These are considered among the highest quality and least risky U.S. oil plays. Both Austin Chalk and Eagle Ford have breakeven rates that are below the industry average at $28 and $32 per barrel of WTI crude, respectively.

This means that as oil prices continue to improve alongside the global economic recovery, more money should be flowing through to Magnolia's bottom line compared to its peers.  Management is targeting mid-single digit production growth this year in anticipation of higher demand and a better pricing environment.

In addition to the cost advantages and growth prospects, what makes Magnolia one of the most appealing small cap energy names is its shareholder friendly nature. It has an active stock buyback program that targets repurchasing 1% of its outstanding shares quarterly. The stock doesn't currently pay a dividend but with dividends part of its capital strategy, it may eventually do so as operating cash flow improves.

Magnolia has historically generated some of the best-operating margins in the industry and it is targeting a full cycle margin of roughly 50% in a rising oil price environment. This along with its conservative balance sheet make it a compelling oil and gas pure play that investors should dig further into.