In this article we will share the 10 best small-cap stocks to buy according to small-cap-focused hedge fund Minerva Advisors.
Established in the fourth quarter of 2002, Minerva Advisors, based in Pennsylvania, is an activist hedge fund managed by David Cohen. The firm specializes in equity investments, concentrating on small-cap and micro-cap value companies listed in the United States. Minerva Advisors employs a variety of investment strategies, including long bias, market dislocation exploitation, event-driven approaches, long-short strategies, thrift conversions, merger arbitrage, and capital structure arbitrage. From time to time, David Cohen launches activist campaigns targeting small portfolio companies in which Minerva Advisors holds relatively large equity stakes. One such example is the newspaper publisher A. H. Belo which was trading at around $4 per share when the stock had $2.58 in net cash per share on its balance sheet as well as other assets with a combined value of more than $4, hence valuing the company’s publishing business at zero.
David P. Cohen holds dual roles as President and Chief Compliance Officer at Minerva Advisors LLC, where he manages investment portfolios and research activities. His expertise lies in investing in small-cap and micro-cap companies, both in the U.S. and internationally, focusing particularly on the industrial and financial sectors. Cohen is the sole managing member of Minerva.
A finance executive tapping away on a digital tablet, demonstrating the company’s digital innovation.
Before his tenure at Minerva, Mr. Cohen founded and served as President of Athena Capital Management, Inc. from 1988 to 2011. Athena later merged with Minerva Advisors. His career began as a research analyst and portfolio manager at a Philadelphia-based investment partnership from 1984 to 1988. Beyond his professional roles, Cohen has extensive board experience. He has been a member of the board of directors at CampusWorks, Inc. since 2011 and previously served on the board of Penn-America Group, a publicly held insurance company, from 1993 to 1997. Cohen earned his undergraduate degree from Haverford College, grounding his career in a solid academic foundation.
Minerva Advisors manages nearly $300 million in discretionary assets, as reported in their Form ADV filed in March 2024. The fund serves 7 clients and recently disclosed holdings of $163 million in managed 13F securities for Q1 2024, with its top ten holdings making up 62.67% of the portfolio.
Our Methodology
The stocks discussed in this article are part of Minerva Advisors’ investment portfolio as of the first quarter of 2024. To provide readers with comprehensive insights into these companies, we’ve included analyst ratings and other pertinent details. Additionally, we highlight the number of hedge fund investors involved in each company. Why focus on the stocks that hedge funds invest in? Our research shows that mimicking the top picks of the best hedge funds can lead to market-beating returns. Our quarterly newsletter’s strategy, which selects 14 small-cap and large-cap stocks each quarter, has returned 275% since May 2014, outperforming its benchmark by 150 percentage points. (see more details here)
10. Saga Communications, Inc. (NYSE:SGA)
Number of Hedge Fund Holders: 4
Regulatory filings reveal that Minerva Advisors owned 233,041 shares of Saga Communications, Inc. (NYSE:SGA) at the end of the first quarter of 2024. These shares were valued at $5,199,145, making up 3.18% of the hedge fund’s overall portfolio. For the recent quarter, Saga Communications, Inc. (NYSE:SGA)’s net revenue decreased by 2.5%, falling to $24.7 million from $25.3 million in the previous year.
In their Q1 2024 earnings call, Saga Communications, Inc. (NYSE:SGA)’s CEO Chris Forgy emphasized the urgent need for important changes due to increasing bad debt expenses and a rise in overdue receivables:
“What would you do if I told you, I have an app that during any given week reaches 91% of all adults 18 plus in the U.S. reaches a diverse audience and provides targetability, both digitally and over the air, is both hyperlocal and national simultaneously delivers the most efficient CPMs anywhere, out delivers all other streaming services like Amazon, Apple Music, YouTube, Spotify satellite radio combined, provides the greatest ROI ad spend ever and does all of these things right now. It’s called radio. Radio isn’t broken. It’s just slowing down, maybe a little misunderstood. And Saga is not big enough in order to have the scale to speed radio back up for the entire sector, but we can speed it up for Saga. And the toughest time to change is not when something is broken, but when something starts to slow down and radio is slowing down…
At best radio gets 7% of the media spend pie. The customers we deal with every single day, the ones that have “great relationships” with us spend over 60% of their money or they’re ad budget with digital products and providers. And I’m not talking about web development, but digital advertising. So for the most part, we as an industry have not yet earned their trust enough to have the 60% discussion with them yet. The majority of our advertisers trust us with just 7% of that discussion. The fact is, this is a bit shocking, but the fact is, in my opinion, all of our 7% is at risk. I stated many times before Saga’s objective is not to become a digital company, but to save and protect the 7%, we have to provide the skills to our sellers necessary to qualify us to have a 60% discussion with our customers, plus the 7% and do it all the time.”
9. DLH Holdings Corp. (NASDAQ:DLHC)
Number of Hedge Fund Holders: 10
At the end of the first quarter of 2024, DLH Holdings Corp. (NASDAQ:DLHC) reported GAAP earnings per share of $0.12, which was $0.01 below analysts’ expectations. However, DLH Holdings Corp. (NASDAQ:DLHC) exceeded revenue forecasts, generating $101 million, which was $2 million more than expected. Regulatory filings reveal that Minerva Advisors held 505,581 shares of DLH Holdings Corp. (NASDAQ:DLHC) at the end of the first quarter of 2024. These shares were valued at $6,653,446, representing 4.07% of their portfolio.
Cove Street Capital stated the following regarding DLH Holdings Corp. (NASDAQ:DLHC) in its fourth quarter 2023 investor letter:
“DLH Holdings Corp. (NASDAQ:DLHC) is a consultant that provides a wide range of services to various Federal health agencies such as the Veterans Administration and Centers for Disease Control. It offers public health and life sciences services and has added high margin cybersecurity capabilities via its acquisition of Grove Resources late in 2022. This is an asset-lite, high free cash flowing business with generally sticky 3 to 5 year contracts. This company trades at a discount to its peers—despite having best in class margins—largely due to an overhang from a high revenue but low margin incumbent contract that the government continues to drag its feet on re-awarding. Our research indicates the stock continues to be priced for a “worst case” scenario with respect to this renewal, and other likely outcomes present a high-upside case. Furthermore, management has been astutely using cash to acquire smaller players in adjacent capabilities—such as Grove—to diversify revenue across more contracts. CEO Zach Parker came in seven years ago when the company was doing $2m in EBITDA; we expect them to deliver ~$45m in EBITDA in FY24. DLHC was a top performer for us in the fourth quarter as the management team continues to execute on its strategy and positions the company to be sold to a larger player.”
8. InfuSystem Holdings, Inc. (NYSE:INFU)
Number of Hedge Fund Holders: 7
Minerva Advisors held 846,851 shares of InfuSystem Holdings, Inc. (NYSE:INFU) valued at $7,274,451 by the end of Q1 2024. This investment made up 4.45% of Minerva Advisors’ portfolio, as per regulatory filings. InfuSystem Holdings, Inc. (NYSE:INFU)’s stock hasn’t done as well as the S&P 500, but the company has made big investments that should start paying off in 2024 and later. According to CEO Rich Dilorio, growth in 2024 is expected to be driven by InfuSystem Holdings, Inc. (NYSE:INFU)’s Biomed and Wound Care businesses, with chances for expansion and higher profits.
“In Biomed, this means completing the GE onboarding and then adding incremental projects to our growing national network of technicians. In Wound Care, this will mean continuing to place hardware into the channel and working with our joint venture partner Sanara to open that channel for distribution of the joint venture’s Advanced Wound Care products. Both of these opportunities will continue to scale and they will become significantly more accretive in 2024. Both have tremendous remaining potential, and both are expected to be material contributors to our top and bottom-line growth for years to come.”
Mr. Dilorio also said in their Q3 2023 conference call that 2023 has been focused on execution. He expects that in 2024, InfuSystem Holdings, Inc. (NYSE:INFU) will see significant improvements in operating returns:
“So, 2023 has been an execution year in terms of delivering new revenue opportunities and setting the stage for more revenue in future years. The next phase of execution will be the fine-tuning and the continuous process of identifying and implementing operating improvements that will improve and maintain our long-term operating margins. That will be the story for the rest of this year (2023) and into next year (2024).”
7. Escalade, Inc. (NASDAQ:ESCA)
Number of Hedge Fund Holders: 2
Minerva Advisors reported holding 537,814 shares of Escalade, Inc. (NASDAQ:ESCA) at the end of Q1 2024, valued at $7,298,136, representing 4.46% of its portfolio according to regulatory filings.
Analyst Gytis Zizys predicts no revenue growth for Escalade, Inc. (NASDAQ:ESCA) in FY24, despite some recent gains, to maintain a margin of safety. After FY24, he expects Escalade, Inc. (NASDAQ:ESCA)’s revenue to grow at a 4% CAGR, about half of the 8.8% suggested by previous research. According to his analysis, the intrinsic value of Escalade, Inc. (NASDAQ:ESCA) is around $15.38 per share, indicating that the company is currently trading at a slight discount to its fair value.
6. Astronics Corporation (NASDAQ:ATRO)
Number of Hedge Fund Holders: 21
At the close of the first quarter of 2024, Minerva Advisors reported owning 463,105 shares of Astronics Corporation (NASDAQ:ATRO), valued at $8,808,258, comprising 5.39% of its total portfolio as per regulatory filings. In the first quarter, Astronics Corporation (NASDAQ:ATRO) saw its sales rise by 18.2%, surpassing expectations, driven by robust growth in aerospace sales. Additionally, gross margins improved from 17.6% to 18.5% thanks to higher volumes and prices.
According to The Aerospace Forum’s analyst Dhierin Bechai, Astronics Corporation (NASDAQ:ATRO)’s cash flow expectations have risen due to its strong Q1 performance and ongoing positive trends. With the stock price currently lower than before, Bechai predicts a potential 70% increase, targeting $32.24 to reach pre-pandemic levels. This upgrade indicates that Astronics Corporation (NASDAQ:ATRO) expects strong demand and revenue to reach pre-COVID-19 levels, leading to a Strong Buy recommendation.
5. Tredegar Corporation (NYSE:TG)
Number of Hedge Fund Holders: 10
In the first quarter of 2024, Tredegar Corporation (NYSE:TG) reported a GAAP EPS of -$0.10, indicating a loss per share. Their revenue for the quarter was $175.74 million, which is 8.2% lower compared to the same period last year. Minerva Advisors’ regulatory filings as of the end of Q1 2024 revealed that they owned 1,494,861 shares of Tredegar Corporation (NYSE:TG), valued at $9,746,494. This holding represented approximately 5.96% of Minerva’s total portfolio.
Analyst Miguel Duartre used the Earnings Power Value method to determine Tredegar Corporation (NYSE:TG)’s intrinsic price assuming stable earnings without growth. The analyst believes Tredegar Corporation (NYSE:TG)’s intrinsic value ranges from $5 to $19 per share, with a base case suggesting $16.9 per share. He sees Tredegar Corporation (NYSE:TG) as potentially undervalued, even in worst-case scenarios of low sales and profitability.
4. Great Lakes Dredge & Dock Corporation (NASDAQ:GLDD)
Number of Hedge Fund Holders: 17
Great Lakes Dredge & Dock Corporation (NASDAQ:GLDD), based in Houston, Texas, serves government agencies at various levels. Great Lakes Dredge & Dock Corporation (NASDAQ:GLDD) operates a range of equipment, including hydraulic and hopper dredges, used in projects like port expansions, coastal restorations, and marine structure constructions. The company is also involved in offshore wind and LNG projects. Minerva Advisors owned 1,312,143 shares of Great Lakes Dredge & Dock Corporation (NASDAQ:GLDD) at the end of Q1 2024, worth $11,468,130, which represented 7.02% of its total portfolio.
In FY2023, Great Lakes Dredge & Dock Corporation (NASDAQ:GLDD) earned 21 cents per share from over $589 million in revenue. Analysts expect profits to more than triple to 72 cents per share in FY2024 with sales reaching $746 million. For FY2025, they forecast earnings of 80 cents per share on a five percent increase in revenue.
Cove Street Small Cap Value Fund stated the following regarding Great Lakes Dredge & Dock Corporation (NASDAQ:GLDD) in its first quarter 2024 investor letter:
“We made some sales during during the quarter as well. At the beginning of 2023, we initiated a position in Great Lakes Dredge & Dock Corporation (NASDAQ:GLDD) in the midst of a significant decline in the company’s results. Facilitated by the U.S. government, the “bid market” of projects for which GLDD competes evaporated in the first half of 2022 due to some combination of an extra-long Continuing Resolution, overly complicated budget authorization and allocation processes, and frankly, work-from-home inefficiencies. When your dredgers aren’t at work because you didn’t get your bid, you send them to the shipyard for maintenance, causing a “double-whammy” of less revenue and higher costs. GLDD’s margins in 2022 got crushed, as did the stock price. The bid market returned in late 2023, and GLDD’s backlog rebounded from $452m around the time of investment to $1.04B in early 2024, leading to a commensurate rise in the stock.
Concurrent with the return of Great Lakes’ core business to normalized conditions, GLDD has begun construction of a “wind vessel” with the purposes of facilitating the building of offshore wind farms on the East Coast of the United States beginning in late 2025. Given the myriad of headwinds facing these projects, this wind ship will be delivered into a highly uncertain demand environment for its use. We happily exited with the gains from our underwritten “bid market reversion” and before “wind” plays out.”
3. Virco Mfg. Corporation (NASDAQ:VIRC)
Number of Hedge Fund Holders: 12
Minerva Advisors reported owning 1,122,101 shares of Virco Mfg. Corporation (NASDAQ:VIRC) at the end of Q1 2024. This investment was valued at $12,253,343, making up 7.5% of their total portfolio. In the first quarter of 2024, Virco Mfg. Corporation (NASDAQ:VIRC) saw a big jump in revenue by 33%, and both their gross and operating profit margins increased. However, much of this growth came from a one-time disaster relief project, without which their revenue would have only grown by 8%.
An analyst from Quipus Capital thinks that Virco Mfg. Corporation (NASDAQ:VIRC) isn’t a good buy at its current price of $15.02 per share. Virco Mfg. Corporation (NASDAQ:VIRC)’s market value is around $243 million as of writing, which gives it a P/E ratio of 10x based on its earnings of $25.5 million. The analyst believes this P/E ratio would be attractive if the company had steadier earnings.
2. The Eastern Company (NASDAQ:EML)
Number of Hedge Fund Holders: 7
At the end of the first quarter of 2024, Minerva Advisors reported owning 488,594 shares of The Eastern Company (NASDAQ:EML), worth $16,382,557. This investment constituted 10.03% of Minerva Advisors’ portfolio, according to regulatory filings.
According to an Investment Doctor analyst, despite the stock seeming overvalued based on its 2023 earnings and cash flow, The Eastern Company (NASDAQ:EML)’s dedication to reaching a 30% gross margin soon still makes it interesting. The analyst forecasts a 5% average revenue increase over the next three years, aiming for a 29% gross margin just below the targeted 30%. This could lift revenue to $316 million, with a gross profit of over $91 million (up from $65 million in 2023), and potentially increase pre-tax profit by $17 million and net income by $13 million.
1. Universal Stainless & Alloy Products (NASDAQ:USAP)
Number of Hedge Fund Holders: 12
Universal Stainless & Alloy Products (NASDAQ:USAP) is benefiting from high demand in aerospace and a favorable product mix, which have led to increased capacity use, higher revenues, improved margins, and operational efficiency. Analyst Stephen Simpson predicts that Universal Stainless & Alloy Products (NASDAQ:USAP) will likely see several profitable years with strong free cash flow. He suggests a fair value in the mid $30s even without more quarters exceeding expectations. However, he notes that Universal Stainless & Alloy Products (NASDAQ:USAP)’s history shows it’s cyclical and hasn’t consistently created long-term value.
By the end of the first quarter of 2024, Minerva Advisors held 772,845 shares of Universal Stainless & Alloy Products (NASDAQ:USAP), valued at $17,273,086. This position represented 10.57% of Minerva Advisors’ total portfolio.
While we acknowledge the potential of ecommerce companies, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than NVIDIA but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None.
