In this article, we will look at the 10 Most Undervalued Small-Cap Stocks To Invest In.

Is Now the Time for Small Caps to Shine?

On January 24, Raymond James Investment Management’s chief market strategist, Matt Orton, appeared on CNBC’s ‘Power Lunch’ to discuss the earnings season and small-cap stocks. Orton believes that the earnings season so far has been very constructive. The unique thing about this earnings season is that it isn’t dominated by a few companies that are doing really well. Instead, the last few quarters have seen an expansion in earnings breadth in several different sectors.

Financials are finally participating in earnings, which holds immense significance. He said that one of the key opportunities he sees in the market at present is a down market cap. Small caps have not participated in much of the upside of the bull market for the past three years because they haven’t had earnings. However, the market is finally seeing an inflection point. Orton says that the key to these market dynamics is selectivity. You can’t just own the Russell 2000 and expect to outperform. Instead, it would be prudent to focus on the market cap and valuation opportunities.

Other experts are reflecting similar expectations. On February 14, Stacey Sears, Emerald Advisers portfolio manager, appeared on ‘Squawk Box’ to talk about the small-cap stock performance and market trends, among other things. She said that earnings growth in this season is coming ahead of expectations. Small caps have essentially been in an earnings recession over the better part of the last two years. She said that fiscal Q4 2024 was the first quarter they expected earnings to turn positive year-over-year, and the data shows that they are outpacing those expectations. The earnings projections were around 2% growth, but they are tracking the growth of high-single digits. The breadth of the outperformance is also encouraging, as the market is seeing a really nice upside within financials, healthcare, and technology. Revisions ratios are turning positive.

Typically, for small caps, the year starts with positive expectations, which gradually get tamped down as the year progresses. However, this year, the market is seeing the expectations hold in, which is highly encouraging for recovery in an asset class that has lagged for the better part of the last two years.

READ ALSO: 10 Best Drug Stocks to Buy Now and 10 Best Food Stocks To Buy Under $20.

Is the Trump Administration a Tailwind for Small Caps?

Experts believe that the Trump administration may create solid tailwinds for two market groups drastically different from each other: small-cap stocks and big banks. While bank stocks are rallying, VettaFi’s Todd Rosenbluth anticipated that small-cap stocks may be one of the biggest players under Trump’s administration. He said that small-caps are majorly shielded from tariff threats and reshoring. CNBC reported that he voiced the following about the scenario:

“If we have a focus on the U.S. and making America even stronger, then small-cap companies stand to benefit from that because they have less multinational exposure.”

Since small-cap stocks do not have as significant multinational exposure as large or mid-caps, they are less likely to face uncertainty during market volatility.

With these trends in view, let’s look at the 10 most undervalued small-cap stocks to invest in.

Our Methodology

We sifted through stock screeners, online rankings, and ETFs to compile a list of 20 stocks with a forward P/E of less than 20 and a market cap between $300 million and $2 billion. We then selected the top 10 stocks that were the most popular among elite hedge funds as of Q3 2024. We sourced the hedge fund sentiment data from Insider Monkey’s database. The list is sorted in ascending order of hedge fund sentiment. Please note that the P/E ratios are as of February 14, 2025.

Why do we care about what hedge funds do? 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 Undervalued Small-Cap Stocks To Invest In

10. Star Bulk Carriers Corp. (NASDAQ:SBLK)

Market Cap: $1.91 billion 

Forward P/E: 6.03

Number of Hedge Fund Holders: 24

Star Bulk Carriers Corp. (NASDAQ:SBLK) provides seaborne transportation solutions in the dry bulk segment. Its vessels transport major bulk, including minerals, grain, and iron ore, and minor bulk, which comprises fertilizers, bauxite, and steel products. The company reported a net income of $81.3 million in fiscal Q3 2024, with an adjusted net income of $83 million. Its total liquidity is also strong at $433 million. With around 153 vessels in its fleet, Star Bulk Carriers Corp. (NASDAQ:SBLK) boasts a significant moat in its industry. The firm’s merger with carrier Eagle Bulk in 2023 further expanded its fleet, allowing it to attain more than $9 million in synergies.

Star Bulk Carriers Corp. (NASDAQ:SBLK) recently approved a dividend distribution of $0.60 per share, consistent with its capital allocation policy. It is focused on generating long-term shareholder value and has returned operational free cash flow after debt service of over $1.33 billion since the beginning of 2021. It remains a favorite for income-focused investors, as shown by its 13.98% dividend yield.

Star Bulk Carriers Corp. (NASDAQ:SBLK) remains in a solid market position, having secured over 76% of its available vessel days at an average Time Charter Equivalent (TCE) rate of $17,010 per day. The company is also strengthening its financial position, reducing its net debt (per vessel) by 53%. Continuing the expansion of its operations, it has attained approval for a new $130m debt facility to finance the delivery of five latest generation high specification eco Kamsarmax Newbuilding vessels that are expected to be delivered by fiscal Q4 2025 and H1 2026 in China. The company ranks tenth on our list.

9. Pathward Financial, Inc. (NASDAQ:CASH)

Market Cap: $1.91 billion

Forward P/E: 11.04

Number of Hedge Fund Holders: 25

Pathward Financial, Inc. (NASDAQ:CASH) is a financial holding company that provides savings and loan services. Its business segments include Consumer, Commercial, and Corporate Services and Other. Its Corporate Services and Other segment comprises particular shared services, retained community bank portfolio, treasury, and student loan lending portfolio. Its Consumer segment, in contrast, provides consumer credit products, meta-payment systems (MPS), warehouse finance, and other tax services.

Fiscal year 2025 has started well for the company, as it made significant progress against its growth strategies in fiscal Q1 2025. It reported earnings of $1.29 per share in fiscal Q1 2025, reflecting a 22% year-over-year growth. Its net income came up to $31.4 million. Pathward Financial, Inc.’s (NASDAQ:CASH) originations were thus strong in the quarter, especially in equipment finance, renewable energy, and working capital. Management expects this momentum to continue throughout the year, bringing a bullish light to the company.

One of the most significant steps for the company was the closing of the sale of its insurance premium finance business in October, along with the subsequent sale of securities. This kickstarted a process of optimizing close to $800 million on Pathward Financial, Inc.’s (NASDAQ:CASH) balance sheet by allowing it to relocate the funds into higher-yielding assets or those with optionality. The company ranks ninth on our list.