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Top Small Cap Stocks To Watch For 2019

Energy is an absolutely fascinating industry to follow right now. On one side, you have oil and gas companies selling at incredibly low valuations, despite the fact that oil prices are above $70 a barrel. On the other side, you have renewable-energy companies with a multitrillion-dollar growth highway ahead of them. 

With these interesting trends emerging, there’s no doubt that investors are looking at this industry. To help investors start their search for great energy investments, we asked three of our investing contributors to each highlight a stock they see as a great buy now. Here’s why they picked these stocks.

Top Small Cap Stocks To Watch For 2019: Vertex Pharmaceuticals Incorporated(VRTX)

Fast-Growing Stocks to Buy: Vertex (VRTX)

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Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX) is one of the leading pharmaceuticals firms when it comes to treating cystic fibrosis (CF).

That may not seem like much of a franchise given all the other more compelling diseases out there, but VRTX has built a $41 billion market cap in the sector and most of its competitors are looking for other places to find an opening.

That is a big deal for pharma companies that usually are strong until patents run down or generics start eating into margins.

Not so with VRTX. Its Q4 numbers came in stronger than expected and Q1 is also coming in bullish, as new approvals keep rolling in for next-generation CF drugs … and it has plenty more in the pipeline to keep this growth going.

Top Small Cap Stocks To Watch For 2019: SunPower Corporation(SPWR)

Despite record solar power capacity additions in the United States and globally, many companies in the solar industry have struggled to turn a profit in recent years. That’s because solar panel and cell manufacturers have been adapting to new market realities, and transforming themselves into stronger and leaner businesses has not come cheap. But while the last few years have been painful, it’s possible investors will be able to look back on them as a crucial turning point for sustainable long-term growth. SunPower might be the most likely solar manufacturer to follow that trajectory.

Management has said the business should return to profitability by the end of 2018. That would be a welcome reprieve for shareholders, as financial flexibility could improve quickly from there. That’s because SunPower recently acquired SolarWorld Americas in a move that will give the high-efficiency solar panel manufacturer a production base in the United States. That could prove valuable from a political standpoint in the near term and from a growth standpoint in the longer term.

As SunPower CEO Tom Werner told The Motley Fool’s Travis Hoium, the deal aligned the company’s strategy with the Trump administration’s aim to bolster U.S. manufacturing. The goodwill motion could make it easier to receive an exemption from tariffs imposed on imported solar panels and solar cells SolarWorld produces abroad (products that don’t have domestic competition anyway). That alone would provide an additional $50 million in adjusted earnings before interest, taxes, depreciation, and amortization in the second half of 2018 and an additional $100 million in adjusted EBITDA in each full year thereafter.

It could also set the stage for SunPower to earn a sweet subsidy package if it builds a new manufacturing facility in the United States — something it will need to do to keep pace with industry demand while simultaneously appeasing the current administration. In other words, if management executes on a growth strategy that hinges on profitable (and possibly "fast tracked") manufacturing expansion in the United States, then this $1.1 billion company could be at the beginning of an awesome long-term growth trajectory.

Top Small Cap Stocks To Watch For 2019: First Solar, Inc.(FSLR)

The most successful American solar panel manufacturer isn’t resting on its laurels. First Solar (NASDAQ: FSLR) weathered industry headwinds in recent years while continuing to plan for the future. That includes boosting total annual manufacturing capacity to 5,700 MW by 2020. Better yet, most of that will comprise its next-generation Series 6 panels, which are more efficient and should be accompanied by lower installation costs.

First Solar ended 2017 with nearly $2.3 billion in cash and an order backlog that should keep production facilities operating at full tilt through the end of the decade. The investment in growing manufacturing capacity will transition the company to rely more heavily on panel sales, rather than revenue generated from developing power systems. That will result in relatively flat revenue growth in the next few years, although management expects higher margins with the new sales mix. Either way, healthy levels of operating cash flow — which totaled $1.3 billion in 2017 — are here to stay.

Top Small Cap Stocks To Watch For 2019: SolarEdge Technologies, Inc.(SEDG)

 In stark contrast to other energy sources, solar power is inherently dependent on external technologies to reach its full potential. For instance, to maximize efficiency and produce closer to their full installed capacity, solar panels require converters, inverters, and energy storage. That’s what makes SolarEdge Technologies an intriguing investment in the renewables space.

The company sells power optimizers, inverters, and software solutions that combine to create the "brains" of a rooftop solar installation. By simplifying the setup and optimizing power output, SolarEdge Technologies can add significant value to investments in solar hardware — and it shows in the company’s recent earnings.

In 2017, the niche hardware manufacturer delivered $607 million in revenue at 35% gross margin and grew operating income 28% compared to 2016. The business offers a rare combination of growth and profits, but even Wall Street was caught off guard by management’s 2018 outlook. SolarEdge Technologies expects to report year-over-year revenue growth of 78% in the first quarter of this year.

While the stock has been on an absolute tear lately — posting year-to-date returns of 43% — the company is well-positioned to grow in lockstep with the broader solar industry. Considering the perennial double-digit growth rates of installations, there’s no telling where this $2.4 billion company could end up in the long term.

Top Small Cap Stocks To Watch For 2019: International Business Machines Corporation(IBM)

IBM investors have missed out on the raging bull market in technology stocks. While the Nasdaq 100 index has more than doubled over the past five years, shares of IBM have shed about 25% of their value. A half-decade of slumping revenue kept many investors away from the century-old tech giant.

That decline is now over, with IBM reporting revenue growth in the fourth quarter of 2017 and expecting growth to continue this year. The actions that the company has taken over the past five years or so, including investing in growth businesses like cloud computing and artificial intelligence, are starting to show tangible results. Growth businesses generated $36.5 billion of revenue last year, up 11%, while the cloud business grew by 24% to $17 billion.

A technology company doesn’t survive for more than a century without building up a track record of transformation. IBM’s latest turnaround isn’t its first, and it won’t be its last. This ability to adapt is a key reason to buy and hold the stock.

For dividend investors, another reason to buy and hold the stock is a world-class dividend. IBM’s current quarterly payout of $1.50 per share works out to a yield of 3.8%, and the company is widely expected to raise that dividend this month, making it 23 years in row. IBM has paid a quarterly dividend without interruption since 1916, through the Great Depression, two World Wars, and its near-collapse in the 1990s.

Dividend investors looking for a high yield and decades of consistency could do a lot worse than IBM.