Small-cap stocks tend to be more prone to volatile pricing swings than their large-cap peers, but it’s also true that small-cap companies have outperformed large caps in recent decades. Investing in smaller, lesser-known companies tends to mean embracing a greater degree of uncertainty, but it’s possible to see great returns with these stocks if you’re willing to weather some short-term volatility and embrace a bit of speculation.
With that in mind, investors who are looking for big growth potential at appealing prices should consider building positions in Changyou.com (NASDAQ:CYOU) and Himax Technologies(NASDAQ:HIMX) this month.
Changyou.com is a Chinese entertainment company that generates most of its revenue from video games that it develops and operates. The linchpin of the company’s gaming business has been its Tian Long Bu Bu (TLBB) franchise — a multiplayer online role-playing game series that lets players fight and train to master different kung fu disciplines in ancient settings loosely based on Buddhist texts and Chinese history.
The developer has a market capitalization of roughly $900 million, and while its earnings have slipped as titles in the TLBB franchise have lost some steam over the past few years due to increased competition, the company is still solidly profitable. Changyou recorded $486 million in revenue and net income of $78 million in 2018 — down from the $127 million in profit it posted on sales of $580 million in 2017, but far from being a terrible performance when viewed in context.
Changyou trades at just 8.5 times this year’s expected earnings, and it looks like the cheaply valued stock is primed for a rebound. While earnings performance for larger video game companies like Activision Blizzard and Electronic Arts has generally become steadier and more predictable as the rise of the games-as-a-service model has allowed them to keep multiple big properties active at the same time, business for smaller gaming companies is still a lot more cyclical. Here’s the good news…
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