In this article, we will discuss 10 micro-cap stocks to buy according to hedge funds. You can skip our detailed discussion on investing in micro-cap stocks and go directly to 5 Micro-Cap Stocks to Buy According to Hedge Funds.
According to historical data, actively managed, value-oriented micro-cap funds have outperformed private equity over time. As per data from alternative-asset analytics firm Preqin, the US Private Equity Index has risen by 716% from the beginning of 1995 to June 2020. While that reflects an attractive return on investment and outperforms the S&P 500 Index’s 255% gain over the same time period, the CRSP Equal Weighted Microcap Index, in comparison, rose by 740%. While short-term price volatility is characteristic of micro-cap stocks, it creates a compelling opportunity for value-oriented funds to uncover excellent entry values for high-quality stocks. Furthermore, the segment’s substantial Merger & Acquisition activity, bolstered by private equity participation, boosts the potential for value generation.
Returns and Performance of Micro-Cap Stocks
Micro-cap stocks are frequently overlooked by institutional investors, despite their outperformance. According to Boston Partners, the Russell Microcap® Index, which includes 1,306 dedicated US micro-cap firms, has a total market capitalization of around $465 billion as of December 2020. Surprisingly, mutual funds and investment institutions own around 78% of the Russell 2000’s net holdings but just 40% of the non-Russell 2000 microcap universe.
The Centre for Research in Security Prices examined stock data from 1926 to 2009, a span of 80 years. The study revealed that micro-cap stocks outperformed low-cap, mid-cap, and large-cap stocks and realized average annual returns of 12.1%, compared to the 9.8% returns generated by large-cap stocks. Micro-cap stocks are said to benefit from the “value effect.” Investors use indicators such as size, price-to-book value, and assets to evaluate equities. These indicators, however, cannot be used to assess growth. As a result, micro-cap companies are frequently mispriced.
However, hedge funds in 2021 looked beyond large cap stocks and showed a keen interest in micro-cap stocks, as evident from the data of over 800 funds tracked by Insider Monkey. These funds, in addition to having huge stakes in big names like Apple Inc. (NASDAQ:AAPL), Tesla, Inc. (NASDAQ:TSLA), and NVIDIA Corporation (NASDAQ:NVDA), piled into micro-cap stocks with high-growth potential in sectors like biotech, healthcare, AI and automation.
Source:Pixabay
Our Methodology
Let’s begin discussing 10 micro-cap stocks to buy according to hedge funds. We have used data of over 800 funds tracked by Insider Monkey to shortlist these companies based on their popularity among these funds. We have also made use of analyst ratings and growth prospects to assess the stocks.
Market cap data is as of December 1.
Micro-Cap Stocks to Buy According to Hedge Funds
10. Neuronetics, Inc. (NASDAQ:STIM)
Number of Hedge Fund Holders: 18
Market Capitalization: $122.9 million
Neuronetics, Inc. (NASDAQ:STIM) provides treatments based upon neuromodulation technology for psychiatric disorders that have shown resistance to traditional medicines through non-invasive intervention. The Malvern, Pennsylvania-based company has provided over four million treatments to 115,000 patients. In the US, 17.3 million adults suffer from major depressive disorder (MDD). This represents a potential market for Neuronetics, Inc. (NASDAQ:STIM). Furthermore, insurance plans of 300 million Americans provide coverage for NeuroStar, the flagship transcranial magnetic stimulation (TMS) treatment for depression. The organization is also working on employing the NeuroStar platform for the treatment of more neurological disorders.
Neuronetics, Inc. (NASDAQ:STIM) reported its Q3 2021 earnings on November 9. The revenues for the period were $13.8 million as compared to the consensus estimate of $14.1 million. COVID-19 is said to have played a part in the company missing the estimates. Meanwhile, the loss per share was 31 cents as opposed to the estimate of 30 cents.
Neuronetics, Inc. (NASDAQ:STIM) also provided revenue guidance for Q4 2021 and FY21. The company anticipates fourth-quarter revenue to be between $13 million and $14 million. Meanwhile, for the full year, Neuronetics, Inc. (NASDAQ:STIM) expects revenue of $53.3 million to $54.3 million as opposed to the estimate of $55.84 million.
On November 9, Matt O’Brien at Piper Sandler issued a price target of $10 on Neuronetics, Inc. (NASDAQ:STIM) with an Overweight rating. The analyst thinks that the operational update provided by the company was “mostly positive.” The company is focusing on increasing patients for its customers having NeuroStar Advanced Therapy for Mental Health by creating more awareness, targeting more indications, and through marketing campaigns as well.
Some of the most popular large-cap stocks include Apple Inc. (NASDAQ:AAPL), Tesla, Inc. (NASDAQ:TSLA), and NVIDIA Corporation (NASDAQ:NVDA). However, the investors who are unable to afford these stocks could turn their attention to micro-cap stocks like Neuronetics, Inc. (NASDAQ:STIM).
9. Elevation Oncology, Inc. (NASDAQ:ELEV)
Number of Hedge Fund Holders: 18
Market Capitalization: $183.71 million
Elevation Oncology, Inc. (NASDAQ:ELEV) is not just a biotech company that is working towards coming up with cancer treatments but also focusing on a future where every patient with cancer can have tests that can disclose the tumor’s distinctive genomic fingerprint that can be treated with targeted therapies.
Elevation Oncology, Inc. (NASDAQ:ELEV) reported its Q3 2021 results on November 21. The loss per share for the quarter was 53 cents as opposed to the analysts’ estimate of 38 cents. Meanwhile, Elevation Oncology, Inc. (NASDAQ:ELEV) disclosed that it has $155.2 million in cash and cash equivalents that can finance its operations until Q2 2023. Elevation Oncology, Inc. (NASDAQ:ELEV) also revealed that it has opened the CRESTONE Study and inducted candidates from the US, Canada, and Australia. The CRESTONE study is a Phase 2 trial to study the impact of Seribantumab in patients with solid tumors of any origin with a positive result of NRG1 fusion.
Robert Driscoll at Wedbush initiated coverage on Elevation Oncology, Inc. (NASDAQ:ELEV) on July 20. The analyst gave an Outperform rating with a $27 target price, anticipating a significant probability of clinical success on the back of strong preclinical data and a direct way to approval from the FDA.
8. Aptose Biosciences Inc. (NASDAQ:APTO)
Number of Hedge Fund Holders: 18
Market Capitalization: $247.23 million
Aptose Biosciences Inc. (NASDAQ:APTO) is a biotech company aiming to transform traditional anti-cancer therapies. Aptose Biosciences Inc. (NASDAQ:APTO) has CG-806 in its pipeline to treat particular B-cell malignancies like chronic lymphocytic leukemia (CLL), small lymphocytic lymphoma (SLL), and some types of non-Hodgkin’s lymphomas, which are resistant to the conventional treatment protocol.
Aptose Biosciences Inc. (NASDAQ:APTO) beat the analysts’ EPS estimate of $0.17 for Q3 2021 by $0.04. Aptose Biosciences Inc. (NASDAQ:APTO) had $95.1 million in cash and cash equivalent as of September 30 and has assumed the business to continue its operations until the start of 2023.
Post Q3 results, Joseph Pantginis at H.C. Wainwright raised the price target on Aptose Biosciences Inc. (NASDAQ:APTO) stock from $9 to $14 and maintained a Buy rating.
7. Nautilus, Inc. (NYSE:NLS)
Number of Hedge Fund Holders: 18
Market Capitalization: $261.25 million
Nautilus, Inc. (NYSE:NLS) is a fitness company that is working on producing high-quality cardio and strength equipment along with digital platforms. The Vancouver, Washington-based company has a presence across 80 countries through its popular brands Bowflex, Modern Movement, Nautilus, Octane Fitness, Schwinn Fitness, and Universal.
Nautilus, Inc. (NYSE:NLS) reported revenue and EPS of $138 million and $0.3, respectively, for Q2 FY22. For the second half, the company provided revenue guidance of $290 million to $320 million. Furthermore, Nautilus, Inc. (NYSE:NLS) anticipates the gross profit margin to rise to 30% in FY23 on the back of added impact of higher-margin subscription business in the form of JRNY workout app available on Google and Apple Platforms. Nautilus, Inc. (NYSE:NLS) expects to have 250,000 to 300,000 paid subscribers for JRNY by the end of FY22.
On November 10, Michael Swartz at Truist maintained a Buy rating but lowered the price target on Nautilus, Inc. (NYSE:NLS) from $23 to $15. The analyst stated that he “remains constructive on the 12-24 month outlook” of the company.
Wasatch Global Investors mentioned Nautilus, Inc. (NYSE:NLS) in its Q1 2021 investor letter. Here’s what the investment management firm said:
“The largest detractor from Fund performance in the first quarter was Nautilus, Inc. (NLS). The company develops, manufactures and markets health and fitness products—including cardio and strength-training equipment and related accessories. The stock fell on news of higher freight costs due to a shortage of shipping containers. The shortage is disrupting the international transport of raw materials, parts and finished goods. While the stock decline was disappointing, we still have a positive view on the company.
Nautilus offers exercise bikes that rival Peloton bikes. From an investment standpoint, the most attractive characteristic of these bikes is that they typically incorporate subscriptions for online fitness instruction. And subscriptions create recurring revenues that are relatively predictable. Nautilus’s stock trades at a valuation that’s about four times the company’s estimated 2021 EBITDA (earnings before interest, taxes, depreciation and amortization). We think this is a very attractive valuation, and we added to our position in the company because we believe the transport disruptions will be resolved within several months.”
6. CymaBay Therapeutics, Inc. (NASDAQ:CBAY)
Number of Hedge Fund Holders: 18
Market Capitalization: $292.75 million
CymaBay Theurapetics, Inc. (NASDAQ:CBAY) is another name from the healthcare sector that is working towards developing innovative treatments for liver and chronic diseases. The Newark, California-based company has Seladelpar in the pipeline. The drug is targeted towards the treatment of Primary Biliary Cholangitis (PBC).
PBC is an autoimmune disease of the liver that results in the damage of the small bile duct of the liver. The drug has already received Breakthrough Therapy and Orphan Drug designation from the Food and Drug Administration in the US. The company commenced a critical Phase 3 study at the start of 2021.
CymaBay Theurapetics, Inc. (NASDAQ:CBAY) revealed data from two clinical studies during The Liver Meeting Digital Experience 2021 organized by the American Association for the Study of Liver Diseases. The data provided evidence that the use of Seladelpar after one year resulted in continuous improvement in markers of cholestasis.
On November 10, Yasmeen Rahimi at Piper Sandler maintained an Overweight rating on CymaBay Theurapetics, Inc. (NASDAQ:CBAY) with a target price of $12. The analyst appreciated the “impeccable execution” in rolling out the 52-week RESPONSE trial at 105 locations. Ms. Rahimi was of the opinion that Seladelpar has “significant pricing power” and CymaBay Theurapetics, Inc. (NASDAQ:CBAY) can bring greater value to patients based on market research.
Hedge funds are now choosing to look beyond large-cap stocks such as Apple Inc. (NASDAQ:AAPL), Tesla, Inc. (NASDAQ:TSLA), and NVIDIA Corporation (NASDAQ:NVDA) and are investing in micro-cap stocks like CymaBay Theurapetics, Inc. (NASDAQ:CBAY).
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Disclose. None. 10 Micro-Cap Stocks to Buy According to Hedge Funds is originally published on Insider Monkey.
