The Best Small-Cap Stock to Buy Right Now for Explosive Long-Term Gains

Most stocks in your portfolio are likely to be large caps, and understandably so. Due to their sheer size, you're familiar with them and their underlying companies.

As the saying goes, though, good things come in small packages. If you're willing to take on some risk in exchange for significant upside potential, consider buying a stake in USA Rare Earth (NASDAQ: USAR).

What is USA Rare Earth?

It's not exactly a household name. In fact, with a market cap of less than $4 billion, there's a good chance you've never even heard of it.

Image source: Getty Images.

Don't be fooled by its small size or lack of notoriety, though. USA Rare Earth packs a powerful, appropriately sized punch.

See, this rare earth metal and mineral miner is sitting on a deposit in Sierra Blanca, Texas, that, as of 2019, was conservatively expected to be capable of producing 20,000 tons worth of valuable rare earth elements (rare earths are used in electronics, electric vehicles, wind turbines, and more) every day for 20 years. That same study from Texas Mineral Resource, however, also suggested there was enough material at the west Texas site -- called Round Top -- to potentially yield marketable elements for over 100 years.

Money-wise, at current prices, the mine could produce more than $100 million in annual rare-earth element revenue, plus on the order of another $200 million in yearly aluminum and lithium production, the latter used in EV batteries.

In the meantime, the company is finalizing construction of a neo-magnet facility in Stillwater, Oklahoma, with production expected to start sometime before the middle of this year. At maximum capacity, this factory -- which makes high-strength industrial magnets out of the aforementioned rare-earth metals -- will be able to manufacture up to 5,000 tons of these critical magnets per year, putting the company in a market that IMARC Group believes is worth $20 billion per year now, en route to more than $30 billion by 2034.

Importantly, USA Rare Earth will help wean the United States from dependence on China for rare-earth elements and rare-earth magnets.

The potential reward is equal to the risk

It sounds like a no-brainer: a $4 billion company sitting on a considerably greater value of critical industrial metals and minerals.

Just don't lose perspective on the matter. There are no guarantees that the amount of useful material expected to be in the mountain at Round Top is actually there. And even if it is there, mining is rarely cheap and never easy. Unexpected and expensive challenges are often encountered.

Such risk can often be more than worth the reward, though. And in this instance, with the amount of geological surveying work that's already been done, paired with the growing need for a domestic supply of rare-earth magnets, the odds of USA Rare Earth's success appear to be above average as well. It's just going to take years to do all the (literal) digging that needs to be done here for the big payoff.

This might help in the meantime: While obviously speculative in the near-term and long run, analysts' current consensus 12-month price target of $32.25 is nearly twice the stock's current price.

James Brumley has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.