In this article, we will take a look at the most promising small-cap stocks according to hedge funds.

Small-Cap Stocks are Expected to Offer Higher Returns in 2025

Small-cap stocks are offering a myriad of opportunities to investors and are expected to go higher. On September 25, Greg Tuorto, Goldman Sachs asset management portfolio manager, appeared in an interview on Yahoo Finance to discuss his thesis on small-cap stocks.

There have been several tailwinds for small-cap stocks, which may have been ignored previously. However, now that the economy is stabilizing, investors may find a variety of undervalued names in the healthcare and technology sectors especially.

Tuorto further added that small-cap stocks have been underperforming for three years, however, in 2024, there is a lot of pent-up opportunity in this area. A year from now, small-cap stocks are expected to deliver unprecedented returns as the economy continues to grow. He expects more IPOs and mergers and acquisitions to come through before 2024 comes to a close.

Nancy Prial, Co-CEO & Senior Portfolio Manager at Essex Investment Management, is also bullish on small caps. We recently covered her views in our article on the 8 Most Undervalued Small-Cap Stocks To Buy According To Analysts. Here’s an excerpt from it:

“Prial noted that small caps have been outperforming in the third quarter, largely driven by expectations of rate cuts, with a 50 basis point reduction being more significant than previously anticipated. She expressed optimism that small caps have substantial room to grow, emphasizing that this could mark the beginning of a multi-year cycle for these stocks. Currently, small-cap stocks are underrepresented in the market, comprising just under 5% of the total equity market, which is at record lows. This low ownership level presents an attractive opportunity for investors.

She pointed out that small-cap stocks remain significantly undervalued compared to their larger counterparts. Prial argued that for small caps to gain traction, several conditions must be met: the continuation of rate cuts, confidence in navigating a soft landing rather than a recession and expanding relative earnings growth. She noted that relative earnings growth for small caps is starting to improve and is expected to surpass that of large caps by the end of the year.”

Biotechs Set to Raise Millions in IPOs

The biotechnology sector is growing rapidly and a large number of startups are expected to go public. On October 7, Reuters reported that three startups are set to raise $400 million in their initial public offerings, amid the sector’s second IPO boom. In September, several drug developers made their market debuts, raising more than $900 million in their IPOs, encouraging other startups to follow suit.

While there is uncertainty around the presidential elections in the United States, biotechnology startups and companies are benefiting from the declining rate cuts. Experts polled by Reuters suggest that biotech companies are of the view that they should exploit the current market momentum rather than wait for presidential elections to normalize the market. However, this also puts immense pressure on other biotech companies to go public as soon as possible.

Now that we have studied the small-cap market, let’s take a look at the 10 most promising small-cap stocks according to hedge funds.

Our Methodology

To find the most promising small-cap stocks according to hedge funds, we used the Finviz stock screener. We set the market capitalization filter to range between $300 million and $2 billion. We then examined the hedge fund sentiment of these stocks as of Q2 2024 and picked the most popular ones. The stocks are sorted in ascending order of the number of hedge fund holders as of Q2 2024.

Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).

10 Most Promising Small-Cap Stocks According to Hedge Funds

10. CONMED Corporation (NYSE:CNMD)

Number of Hedge Fund Holders: 25

Market Capitalization as of October 10, 2024: $1.97 Billion

CONMED Corporation (NYSE:CNMD) is a manufacturer of medical equipment and general surgical tools. Some of its products include fixation devices, dilators, electrosurgical units, hemostasis, biomedical sensors, and specimen bags, to name a few.

The company has a history of introducing breakthrough technologies to the medical industry. Some of them include the AirSeal iFS, the only insufflator proven to enhance medical procedures, the Autoclavable Camera Head, the first of its kind, and the Hall Lithium Batteries, the first fully autoclavable battery. CONMED Corporation (NYSE:CNMD) is also known for its impactful partnerships and acquisitions that have led to what the company is today.

CONMED’s (NYSE:CNMD) commitment to innovation is what contributes to its position on our ranking as one of the most promising small-cap stocks. The company expects full fiscal year 2024 revenue to range between $1.305 billion to $1.315 billion and research and development expenses to increase by 4% to 5%.

CONMED Corporation (NYSE:CNMD) is striving to meet the unmet needs of healthcare customers, which is also an avenue for increased market share. In addition to that, the company is also working to expand its portfolio and step into high-growth and high-value markets. All these strategic initiatives combined promise strong financial growth and increased market share.

9. MYR Group Inc. (NASDAQ:MYRG)

Number of Hedge Fund Holders: 27

Market Capitalization as of October 10, 2024: $1.94 Billion

MYR Group Inc. (NASDAQ:MYRG) is a construction engineering company that offers electrical construction services for transmission and distribution lines, substations, buildings, and renewable energy.

The company consists of 13 premier electrical contractors who are responsible for the promotion of cross-collaboration so that customers can enjoy integrated and innovative solutions that meet their personalized needs. MYR Group Inc. (NASDAQ:MYRG) is set up for long-term growth, because of its presence in high-growth markets.

While all of its segments are performing well, its data center market is expanding at a rapid pace due to the growing demand for artificial intelligence and the increasing need for power, storage, and cloud services. It is to be noted that investor-owned electric companies spent nearly $26.7 billion on transmission in 2022. These companies are projected to invest almost $121 billion in transmission construction between 2023 and 2026. Such provides a golden opportunity for MYR Group Inc. (NASDAQ:MYRG), and if exploited the company may emerge as a market leader in the industry.

Overall, MYR Group Inc. (NASDAQ:MYRG) has strong fundamentals and long-standing relationships with customers. This, along with its large specialized fleets, helps the company deliver high-quality services to its clients, putting it ahead of its competition.

Artisan Partners’ Artisan Small Cap Fund stated the following regarding MYR Group Inc. (NASDAQ:MYRG) in its fourth quarter 2023 investor letter:

“We initiated new GardenSM positions in IPG Photonics, MYR Group Inc. (NASDAQ:MYRG) and elf Beauty during the quarter. MYR Group is a regional leader in specialty contracting for electrical power and electrical construction. The company’s work spans the electrical infrastructure, from power generation to the grid to complicated electrical projects. Furthermore, while utility work ends outside, MYR continues inside buildings, including high and medium voltage, along with complicated low voltage work. We believe MYR Group is a high-quality business serving markets in the early innings of multiyear growth cycles driven by reshoring, the energy transition and grid modernization.