Revisiting Microcaps With 2 New Outperforms

Microcaps seem to be catching a bid of late, as they say, as the asset class has rallied nearly 20% over the last 2 months vs. flattish performance by the S&P 500. So I feel now is a good time to revisit the nuances of the asset class.

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As we’ve highlighted in previous discussions,https://www.zacks.com/commentary/2280886/are-microcaps-setting-up-to-outperform, microcaps are acutely sensitive to interest rates and macro conditions, and the January effect as well, though recent history suggests the correlation for the latter is less strong.

And as we previously highlighted, the valuation gap with their large cap brethren was also quite stark so perhaps some investors are now drawn to their comparative value.

Most importantly, investors need to be reminded that microcaps, from a standard deviation perspective, are about “twice” as volatile as large caps. So if major short-term price gyrations make you uncomfortable, this may not be the asset class for you.

In my opinion, the biggest risk factor for the asset class remains the interest rate question. I currently side with the cautionary economists who fear that inflation may resurface in 2026 and put a halt to rate decreases by the Fed, which may be fueling part of this rally.

Tariff pass-throughs remain a real threat as previous inventory stocking winds down, coupled with a tighter labor supply and continued outsized fiscal spending. These are all compelling inflationary factors which need to be considered and which may ultimately derail a rate loosening trajectory.

That being said, let’s dive into 2 recent Zacks’ launches, which upon first glance, may appear to be two ships passing in the night.

Motorsport Games Inc. (MSGM) is a racing video game developer, publisher, and esports ecosystem provider focused on officially licensed motorsport racing series. It’s racing video game “Le Mans Ultimate” is growing revenue significantly and appears well received by the market.
 

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We believe the sociological underpinning for gaming may be underappreciated. For young people, especially young males, gaming is a growing form of socialization and expression. Perhaps supplanting, to some degree, previous forms of socialization like meeting up for beers. The widely cited decrease in alcohol consumption by the younger generation is noteworthy.

Additionally, Motorsport Games Inc. (MSGM) posted a gaudy 80% Gross Margin last quarter, thus ranking high on the Zacks microcap screen. And it offers an option upside with a console version for Play Station and X-box to be released in late 2026 or early 2027.

The other microcap, Daily Journal Corporation (DJCO), was recently upgraded to Outperform from Neutral. Recall that Zacks has elected to define microcap as sub $1 Billion market cap. 

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Its legacy business of newspaper publishing would appear to be that ship passing in the night on a wayward course into the past. But this business has stabilized while the other business, Journal Technologies, is now 80% of revenue and grew 32% this past fiscal year.

Journal Technologies, Inc., a wholly owned subsidiary of Daily Journal Corporation (DJCO), develops and supports case management software systems used by courts, prosecutors, public defenders, probation departments, and other justice agencies. Its products—such as eCourt®, eProsecutor™, eDefender™, and eSupervision™—are designed to manage electronic case information and facilitate public-facing services like e-filing and online citation payments.

Its large marketable securities balance of near $500 m is arguably obscuring the valuation of its high growing software business. And this asset could be risk-free dry powder for acquisitions or investing more heavily in growth.

 

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This article originally published on Zacks Investment Research (zacks.com).

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