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.
A senior executive looking up at a large boardroom filled with the stocks their company manages.
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.
8. Soleno Therapeutics, Inc. (NASDAQ:SLNO)
Number of Hedge Fund Holders: 29
Market Capitalization as of October 10, 2024: $1.99 Billion
Soleno Therapeutics, Inc. (NASDAQ:SLNO) is a specialty biotechnology company that ranks eighth on our list of the most promising small-cap stocks according to hedge funds. The company is currently developing Diazoxide Choline Extended-Release (DCCR), a tablet that treats Prader-Willi Syndrome (PWS), a genetic disorder.
The drug has already completed its phase 3 trials and is currently being evaluated in a phase 3 clinical development program. As for PWS, the five major concerns for Soleno Therapeutics, Inc. (NASDAQ:SLNO) include reducing hunger, improving behavior around food, enhancing metabolic health, reducing temper, and reducing OCD. The tablet also has the potential to treat other diseases such as obesity-associated mutations and life-threatening hypoglycemia.
In the second quarter of 2024, Soleno Therapeutics, Inc. (NASDAQ:SLNO) submitted a New Drug Application to the U.S. Food and Drug Administration (FDA) for the usage of DCCR as a treatment of PWS. During the same quarter, the company achieved a significant milestone after it was granted the “Breakthrough Therapy” designation for DCCR as a treatment for patients with genetically confirmed PWS and hyperphagia.
In Q2 2024, the company spent $12.3 million on research and development, compared to $5.1 million in the same quarter in 2023. Soleno Therapeutics, Inc. (NASDAQ:SLNO) is accelerating its communications with the FDA and is also working to improve supply chain activities. Overall, the company is positioned for solid growth in the coming years.
7. Akero Therapeutics, Inc. (NASDAQ:AKRO)
Number of Hedge Fund Holders: 31
Market Capitalization as of October 10, 2024: $1.98 Billion
Akero Therapeutics, Inc. (NASDAQ:AKRO) ranks seventh on our list of the most promising small-cap stocks according to hedge funds. The biotechnology firm, along with its subsidiaries, engages in the development of treatments for patients with serious metabolic diseases.
The company has several ongoing clinical studies. Akero Therapeutics’ (NASDAQ:AKRO) leading drug, efruxifermin (EFX), is designed to protect people against cellular stress and helps regulate metabolism levels throughout the body.
The drug is currently being tested for MASH by addressing all drivers of disease progression. If positive, this will position Akero Therapeutics (NASDAQ:AKRO) as a prominent contender for developing an effective treatment for this severe case of liver inflammation. Currently, secondary endpoints show that EFX has the potential to sustain fibrosis improvement through 96 weeks of treatment.
Analysts are bullish on the stock and why wouldn’t they be? The stock has shown consistently promising results and is emerging as a prominent stakeholder in the pharmaceutical industry. Analysts’ price target of $49.5 points to an upside of 67% from current levels.
6. Vestis Corporation (NYSE:VSTS)
Number of Hedge Fund Holders: 34
Market Capitalization as of October 10, 2024: $1.96 Billion
Vestis Corporation (NYSE:VSTS), formerly referred to as Aramark Uniform Services, is a provider of rental uniforms and workplace supplies. The company services the automotive, food, manufacturing, healthcare, and cleanroom industries.
Some of its products include mops, uniforms, first aid kits, floor mats, towels, and linens. The company processes more than 345 million garments every day and services over 300,000 customers in more than 340 locations. Vestis Corporation (NYSE:VSTS) leverages technology to understand and address the unique needs of customers.
Vestis Corporation (NYSE:VSTS) believes its new delayered business structure and sales leadership will promise accelerated growth for the company ahead. In addition to that, the company witnessed an improvement in customer retention rates, validating its decision to decrease pricing. Overall, its new business structure is expected to generate $8 million in annualized gross returns.
The company’s new business structure and leadership are expected to turn things around for VSTS. As its retention rates suggest, the company has already begun to reap the benefits of the strategic changes Vestis (NYSE:VSTS) has committed to this year.
5. RxSight, Inc. (NASDAQ:RXST)
Number of Hedge Fund Holders: 34
Market Capitalization as of October 10, 2024: $1.96 Billion
RxSight, Inc. (NASDAQ:RXST) ranks fifth on our list of the most promising small-cap stocks according to hedge funds. The ophthalmic medical device company develops light-adjustable lenses (LAL) and devices for patients with a cataract who require surgery.
The lenses developed by RxSight, Inc. (NASDAQ:RXST) are adjustable, meaning they can meet the unique needs of a patient. Using UV light treatments, the adjustable lenses are fine-tuned, providing customized care to a patient. 96% of surgeons were willing to recommend LAL and 80% stated they would choose the LAL for themselves.
In the second quarter of 2024, the company logged revenue worth $34.9 million, up by 68% year-over-year. During the quarter, RxSight, Inc. (NASDAQ:RXST) sold 78 light delivery devices and over 24,000 light adjustable lenses, representing an increase of 16% in sales and 92% in procedure volume, respectively.
Overall, the company is striving to establish adjustable procedures as a common treatment for patients. RxSight, Inc. (NASDAQ:RXST) is confident in the sustainable adoption of its treatment, positioning it as a revolutionary in the healthcare industry.
4. Celldex Therapeutics, Inc. (NASDAQ:CLDX)
Number of Hedge Fund Holders: 34
Market Capitalization as of October 10, 2024: $1.99 Billion
Celldex Therapeutics, Inc. (NASDAQ:CLDX) is one of the most promising small-cap stocks to buy according to hedge funds. The biopharmaceutical company develops monoclonal and bispecific antibodies that tackle diseases with inadequate treatments available.
On the financial front, Celldex Therapeutics, Inc. (NASDAQ:CLDX) logged $2.5 million in revenue in the second quarter of 2024, up from $0.3 million in the same quarter in 2023. In addition to that, the company spent nearly $40 million on research and development. Expenses were dedicated to the clinical trials of its humanized monoclonal antibody, Barzolvolimab.
2024 has been quite a year for Celldex Therapeutics, Inc. (NASDAQ:CLDX). So far, the company has initiated several studies, commenced phase 3 and 2 trials for some of its drugs, and presented data to showcase the clinical benefits of its drug that treats urticaria. As the year comes to an end, the company is committed to developing a drug for inflammatory diseases.
The company has several developments in its pipeline. Moreover, Celldex Therapeutics, Inc. (NASDAQ:CLDX) is also well capitalized with $800 million locked in to support these programs. If these drugs pass trials and reach the market, the company may be able to position itself as an emerging leader in pharmaceuticals. 34 hedge funds were bullish on the stock at the end of Q2 2024.
3. PHINIA Inc. (NYSE:PHIN)
Number of Hedge Fund Holders: 35
Market Capitalization as of October 10, 2024: $1.96 Billion
With 35 hedge funds bullish on PHIN as of Q2 2024, the company ranks third on our list of the most promising small-cap stocks according to hedge funds. PHINIA Inc. (NYSE:PHIN) is a fuel-efficient company that develops and supplies fuel injection systems for the automotive and industrial sectors. Some of its products include alternative fuel systems, evaporative canisters, electrical systems, fuel delivery modules, and hydrogen solutions.
The company is committed to sustainability and is making significant investments to reduce carbon emissions. In September, PHINIA Inc. (NYSE:PHIN) launched a first-to-market technology that reduces emissions and increases fuel efficiency for small highway diesel engines. For the fiscal year ended 2023, the company invested 78% of its research and development spend in fuel efficiency and alternative technology initiatives. Of this 30% was directed to zero and low-carbon fuel systems.
In the second quarter of 2024, PHINIA Inc. (NYSE:PHIN) logged $863 million in revenue. Through the decade, the company grew its organic sales at a compound annual growth rate of 2% to 4%. Revenue growth was primarily driven by non-contractual commercial negotiations and increasing sales in Europe for its aftermarket segment. However, vehicle sales were slower in the region but were offset by aftermarket sales.
For the complete fiscal year 2024, PHINIA Inc. (NYSE:PHIN) expects revenue to range between $3.4 billion to $3.6 billion. The company has a diverse range of offerings and has strong fundamentals, allowing it to meet the growing demand for carbon-free solutions.
Ariel Investments’ Ariel Focus Fund stated the following regarding PHINIA Inc. (NYSE:PHIN) in its first quarter 2024 investor letter:
“Manufacturer of premium fuel and electrical systems, Phinia Inc. (PHIN) also traded up in the period on solid earnings results and a positive full year 2024 outlook. Healthy consumer pricing, new business wins across all end markets, ongoing weakness in electric vehicles, growth in light vehicle original equipment and strong cost controls, more than offset disappointing commercial vehicle sales in China. Meanwhile, management continues to prioritize capital returns to shareholders via buybacks and dividends. Looking ahead, we expect PHIN to deliver sustainable, profitable growth and significant cash generation as it captures operational efficiencies, exits agreements with its former parent company BorgWarner Inc. and also expands its industrial and aftermarket customer base.”
2. NCR Voyix Corporation (NYSE:VYX)
Number of Hedge Fund Holders: 43
Market Capitalization as of October 10, 2024: $1.97 Billion
NCR Voyix Corporation (NYSE:VYX) is an IT company that offers a cloud-based platform and other solutions to retail stores and restaurants. On average, the company facilitates 26 million transactions per hour and sells 1.2 billion items per month. It has over 75,000 retail lines and more than 30,000 restaurant sites on its platform. Some of its leading customers include Walmart, Target, Circle K, and Fifth Group.
The company made several strategic moves during the second quarter. NCR Voyix Corporation (NYSE:VYX) signed an agreement to sell its digital banking segment to Veritas Capital for $2.45 billion. The deal is expected to close before the end of 2024. NCR Voyix Corporation (NYSE:VYX) also signed an agreement to transition its hardware business to an outsourced design and manufacturing model, Ennoconn Corporation. NCR will continue to sell its hardware products as a sales agent while leveraging Ennoconn’s scale of operations and hardware design expertise.
The company’s go-forward strategy is to acquire new customers and optimize resources. During the second quarter of 2024, 220 new restaurants and 45 new retail customers signed up for NCR’s services. To align with this goal, NCR Voyix Corporation (NYSE:VYX) also established programs to realize cost reductions. During the same quarter, the company eliminated nearly $75 million in annualized labor costs. Once the sale of its digital banking segment is closed, the company will realize an additional $30 million reduction in annual non-payroll cost reduction.
Overall, NCR Voyix Corporation (NYSE:VYX) has experienced rapid growth along with significant cost reductions. The company has strong fundamentals and expects to generate between $3.6 billion to $3.7 billion in revenue for the fiscal year 2024.
ClearBridge Investments’ ClearBridge Mid Cap Strategy stated the following regarding NCR Voyix Corporation (NYSE:VYX) in its first quarter 2024 investor letter:
“Stock selection in the IT sector also weighed on performance. Investor excitement for AI has driven outperformance in hypergrowth companies but weighed on several of our holdings with more conservative outlooks, which are typically appropriate this early in the year. This included NCR Voyix Corporation (NYSE:VYX), which provides software, consulting and technology services for digital commerce and automatic teller machines (ATMs). Under new direction since the spinoff of NCR Atleos in the fourth quarter of 2023, the stock is still looking for solidification of its investor base. However, we are encouraged by the company’s focus on recurring revenue streams, which should allow it to grow at an attractive pace. Additionally, we believe that NCR Voyix’s current valuation is approximately equivalent to the value of its digital banking segment alone, which should merit further upward price movement.”
1. Silicon Motion Technology Corporation (NASDAQ:SIMO)
Number of Hedge Fund Holders: 43
Market Capitalization as of October 10, 2024: $2.01 Billion
Silicon Motion Technology Corporation (NASDAQ:SIMO) ranks first on our list of the most promising small-cap stocks to buy according to hedge funds. The American-Taiwanese company is a supplier of NAND flash controllers for solid-state storage devices. Its customers include NAND flash makers, module makers, and hyperscalers. Some of its products include SSD controllers, mobile storage controllers, and expandable storage controllers such as flashcards and USB flash drives.
The company was founded in 1995 and now operates from offices in Hong Kong, Taiwan, and the United States. In the second quarter of 2024, the company generated revenue worth $210.7 million, up by 50% year-over-year. Revenue from SSD controllers grew by 30% year-over-year and increased for the fifth consecutive quarter.
During the year, Silicon Motion Technology Corporation (NASDAQ:SIMO) locked in new programs with flash makers. In addition to that, its new controllers for personal computers and mobile phones can deliver high performance and manage AI workloads.
In the first half of 2024, Silicon Motion Technology Corporation (NASDAQ:SIMO) reported strong financial results. As the company’s share of flash makers continues to increase and its product portfolio continues to expand, the company will report strong financial performance in the second half of 2024 and thereafter.
Ave Maria Growth Fund stated the following regarding Silicon Motion Technology Corporation (NASDAQ:SIMO) in its first quarter 2024 investor letter:
“Silicon Motion Technology Corporation (NASDAQ:SIMO) is a fabless semiconductor company that specializes in low-end flash memory controllers. Memory manufacturers often design their own controllers in-house, but the rising cost of developing a chip is making it increasingly beneficial to outsource the more commoditized low-end controller development to a third party like Silicon Motion. This outsourcing trend is set to move from consumer applications into the server end market, and Silicon Motion’s new enterprise controller is well positioned to capitalize on the growth.”
Overall, SIMO ranks first among the 10 most promising small-cap stocks according to hedge funds. While we acknowledge the potential of technology companies, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than SIMO but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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