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3 Top Small-Cap Stocks to Buy in January

The stock market may have crashed in March because of the coronavirus pandemic, but it's been on a nine-month bull run ever since. Mid-cap stocks are up 78% and the S&P 500 is up 58%. But it's clear that small-cap stocks won the year -- the Vanguard Small-Cap ETF shows that these stocks bounced some 100% off March lows.

Investors looking for winning stocks this year might want to wade into the shallow end of the market capitalization pool. Below are three companies trading at market caps between $300 million and $2 billion that you will definitely want to consider buying in January.

Image source: Getty Images.

1. Catalyst Pharmaceuticals ($364 million market cap)

An argument can be made that all the bad news has been baked into the stock price of Catalyst Pharmaceuticals (NASDAQ: CPRX), a small commercial-stage biotech whose primary therapy, Firdapse, treats a rare autoimmune disorder called Lambert-Eaton myasthenic syndrome (LEMS). Though impacted by the COVID-19 outbreak -- stay-at-home orders led to doctor diagnosing few, if any, new LEMS patients -- the drug may gain some traction in 2021.

Unfortunately, the company stumbled in attempts to expand the drug's list of indications just as Jacobus Pharmaceutical received a surprise FDA approval for Rezurgi, a competing -- and cheaper -- therapy for children. Catalyst's legal challenges to the rival drug's FDA approval failed. Firdapse is classified as an orphan drug and should have had seven years of marketing exclusivity. While the decision is being appealed, there are no assurances it will succeed.

But all hope is not lost. Around 99% of all LEMS patients are adults, and Jacobus can't market Rezurgi to them (though off-label prescriptions could still cut into Catalyst's business). Catalyst has also seen an uptick in new patients beginning to register in the third quarter, which should help further expand the market for Firdapse.

This one obviously carries some risk. But with the stock trading at five times trailing earnings and five times next year's estimates, it may just have a catalyst for growth in 2021.

2. OrganiGram Holdings ($385 million)

The bullishness on pot stocks that was supposed to occur following Canadian legalization in 2018 hasn't been fully realized in Canada or the U.S., with the top marijuana ETF, ETFMG Alternative Harvest (NYSEMKT:MJ), down 54% over the last three years. Not even a pandemic that forced everyone to sit at home could lift many publicly traded marijuana producers, like OrganiGram Holdings (NASDAQ: OGI), whose stock tumbled 21% over the past 12 months.

In fact, the pot stock market may be in the middle of a wave of consolidation. The first stage was when major beverage corporations such as Constellation Brands and Molson Coors bought large stakes in pots producers Canopy Growth and HEXO, respectively. The next phase could be consolidation within the industry. Aphria and Tilray, for example, just agreed to a merger that formed the largest cannabis company in the world in terms of revenue. Some analysts believe that OrganiGram could become the next takeover target.

OrganiGram launched 40 new products last year and saw revenues jump 23% in the fourth quarter as costs dropped 22%. Even though net losses widened to $38.6 million for the period, it also ended the quarter with almost $75 million in cash.

I wouldn't buy OrganiGram just for its acquisition potential, but rather because it is a narrowly focused, streamlined operation, diligently concentrating on its Moncton cultivation facility in New Brunswick. Having invested considerable sums of money in equipment that can produce high-margin products, such as infused chocolates and dissolvable powders that increase the uptake of cannabinoids, OrganiGram is setting itself up to succeed in the event of more widespread legalization.

3. Vaxart ($725 million)

Unlike Catalyst Pharmaceuticals or OrganiGram, biotech Vaxart (NASDAQ: VXRT) has had a phenomenal 2020, and it might have the legs to run even further.

Shares of the clinical-stage drug developer rose over 1,700% this year, and its COVID-19 vaccine candidate has investors hopeful that it can become not just one more in a growing line up of vaccines, but possibly even the preferred option. Its VXA-CoV2 solution is a shelf-stable oral tablet, giving it a major competitive advantage over the two vaccines that have already been approved.

The mRNA vaccine developed by Pfizer and BioNTech, for example, has to be stored at minus 94 degrees Fahrenheit in medical grade freezers that many hospitals simply do not possess. Like the mRNA vaccine from Moderna, that vaccination schedule also require two injections. Vaxart's alternative would be a significant benefit to those who don't want to endure getting shots -- making herd immunity more achievable, more quickly. To add to the list of possible pros, pre-clinical data suggests VAX-CoV2 provides potentially even greater protection against COVID-19 than other vaccines.

Vaxart says its vaccine is capable of "inducing both a robust systemic immune response and a strong mucosal immune response, specifically in the lungs." Of course, this needs to be proven in human trials before the company can entertain the idea of Emergency Use Authorization (EUA) from the U.S. Food and Drug Administration.

While Vaxart's stock would've turned a $100,000 investment into nearly $2 million in 2020, that doesn't mean there isn't more where that growth came from. It doesn't have a product on the market yet, and its therapies are only in stage 2 trials or earlier -- but there does appear to be hope that Vaxart is more than the typical biotech flash in the pan.

10 stocks we like better than Catalyst Pharmaceuticals
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Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Constellation Brands and OrganiGram Holdings. The Motley Fool recommends HEXO. The Motley Fool has a disclosure policy.


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