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.
Stock market charts. Photo by Kaboompics.com on Pexels
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.
8. Peabody Energy Corporation (NYSE:BTU)
Market Cap: $1.97 billion
Forward P/E: 12.19
Number of Hedge Fund Holders: 25
Peabody Energy Corporation (NYSE:BTU) is a coal producer that provides essential products for producing reliable energy and steel. It owns interests in coal mining operations based in Australia and the US, along with interests in Middlemount Coal Pty Ltd. The company’s segments include Seaborne Thermal Mining, Seaborne Metallurgical Mining, Powder River Basin Mining, Other U.S. Thermal Mining, and Corporate and Other. Along with mining, the company provides coal marketing, brokerage, and transportation services. The company has been focusing on expanding metallurgical coal production, which is crucial in steel manufacturing.
Due to this transitional phase, Peabody Energy Corporation’s (NYSE:BTU) financial performance suffered in 2024. Revenue declined from $4.94 billion in 2023 to $4.24 billion, and net income dropped from $759.6 million to $370.9 million in 2024. However, these declines are temporary due to the capital-intensive nature of metallurgical coal production and a longer ramp-up period than thermal coal.
Apart from these short-term headwinds, the company’s expansion initiative is expected to help it attain higher margins in the long run. Its Centurion Mine in Queensland’s Bowen Basin is expected to produce 4.7 million tons annually. By 2025, Peabody expects metallurgical coal production to reach 8.5 million tons, with major contributions from Centurion and Shoal Creek. Peabody Energy Corporation’s (NYSE:BTU) acquisition of Tier 1 coal mines from Anglo American is anticipated to further bolster its industry position.
7. Skyward Specialty Insurance Group Inc. (NASDAQ:SKWD)
Market Cap: $2 billion
Forward P/E: 15
Number of Hedge Fund Holders: 26
Skyward Specialty Insurance Group Inc. (NASDAQ:SKWD) is a specialty insurance company that provides commercial property and casualty (P&C) solutions and products on an admitted and non-admitted basis, predominantly in the US. It specializes in industry solutions, healthcare professional liability, medical stop-loss, management and professional liability, specialty property and liability, programs and captive solutions, and surety. The company’s operations are divided into eight divisions: Accident & Health, Captives, Global Property and Agriculture, Industry Solutions, Professional Lines, Programs, Surety, and Transactional E&S.
Skyward Specialty Insurance Group Inc. (NASDAQ:SKWD) boasts disciplined pricing and risk management that can protect its capital in the long term. In 2023, many property and casualty insurers posted underwriting losses with a combined ratio of 101.5%; Skyward Specialty Insurance Group Inc. (NASDAQ:SKWD) delivered a 90.7% ratio, showcasing its capability to drive consistent profits and reinforcing its investment appeal.
The company has strong profitability and a book value per share growth of 23% annually over the past three years. If its book value continues to grow at a conservative 16% per year, the company’s stock could reach $107.23 by 2029, representing a 19% CAGR from current levels. Discipline execution, strong management, and industry tailwinds lend Skyward Specialty Insurance Group Inc. (NASDAQ:SKWD) significant upside potential.
6. Foot Locker, Inc. (NYSE:FL)
Market Cap: $1.93 billion
Forward P/E: 15
Number of Hedge Fund Holders: 27
Foot Locker, Inc. (NYSE:FL) is a retailer of shoes and apparel that operates in three segments: North America, Europe, Middle East, and Africa (EMEA), and Asia Pacific. Its portfolio of brands includes Foot Locker, Kids Foot Locker, Champs Sports, atmos, and WSS. The omnichannel retailer operates around 2,523 stores in 26 countries across Europe, North America, New Zealand, Australia, and Asia.
The company experienced total comp growth of 2.4% in fiscal Q3 2024, attributed to share gains from its global Foot Locker and Kid Foot Locker banners, which drove 2.8% comp growth. In addition, Foot Locker, Inc.’s (NYSE:FL) WSS and Champs Sports banners were up 1.8% and 2.8%, respectively. This growth was supported by strength in the back-to-school period.
Foot Locker, Inc. (NYSE:FL) is also demonstrating disciplined expense management, which is helping its growth. This includes executing its Cost Savings plan, which is anticipated to deliver $90 million in savings instead of the company’s expectation of around $80 million. While Foot Locker, Inc. (NYSE:FL) is seeing cautious discretionary spending, its controlled inventory levels give it the agility and flexibility to flow products across multiple brand partners and match supply with consumer demand. It ranks sixth on our list.
5. Pitney Bowes Inc. (NYSE:PBI)
Market Cap: $1.92 billion
Forward P/E: 8.86
Number of Hedge Fund Holders: 28
Pitney Bowes Inc. (NYSE:PBI) is a shipping and mailing company that provides logistics, technology, and financial services to small and medium-sized businesses, retailers, large enterprises, and government clients. Its segments are divided into Presort Services, Global Ecommerce, and SendTech Solutions.
2024 was a transformative year for the company, as it made meaningful progress across all of its four strategic initiatives. These included slashing its costs and excess overhead, deleveraging its balance sheet, freeing up trapped cash, and more. It reported a revenue of $2.027 billion for fiscal year 2024, which aligned with its expectations. Adjusted EPS for the year came to $0.82, up 34% over the prior year. Pitney Bowes Inc. (NYSE:PBI) also underwent a 25% growth in adjusted EBIT over the previous year.
The company removed around $30 million in annualized costs during fiscal Q4 2024, bringing its run rate to around $120 million in annualized savings exiting 2024. Management now expects to attain a total of $170 million to $190 million in net annualized savings, up from the previously announced target of $150 million to $170 million. Pitney Bowes Inc. (NYSE:PBI) plans to realize the remaining savings over the course of 2025 and 2026. These cost reductions will be majorly driven by IT system simplifications, overhead reductions, reduced vendor spending, and facility consolidation. The company’s future plans of cost savings and continual improvement rank it fifth on our list of the 10 most undervalued small-cap stocks to invest in.
4. International Seaways, Inc. (NYSE:INSW)
Market Cap: $1.88 billion
Forward P/E: 4.95
Number of Hedge Fund Holders: 30
International Seaways, Inc. (NYSE:INSW) is a tanker company that provides energy transportation services for petroleum and crude oil products in international flag markets. The company’s operations are divided into two segments: Product Carriers and Crude Tankers. The Crude Tankers segment comprises a fleet of VLCCs, Suezmaxes, and Aframaxes and undertakes worldwide transportation of crude oil.
The company reported $92 million in net income for fiscal Q3 2024 and an adjusted net income of $78 million. Its EBITDA was over $143 million, with adjusted EBITDA at $130 million. International Seaways, Inc. (NYSE:INSW) has nearly $700 million in total liquidity, which includes over $540 million of undrawn revolver capacity. With a gross debt of $660 million and a net debt of $500 million, the company’s net loan-to-vessel value is historically low at under 14%.
International Seaways, Inc. (NYSE:INSW) recently announced a combined dividend of $1.20 per share, which equates to over 75% of its fiscal Q3 2024 adjusted net income. Over the last 12 months, the company has returned over 12% of its average market cap and is continually focused on its balanced capital allocation approach. These initiatives position International Seaways, Inc. (NYSE:INSW) for long-term success with opportunistic fleet renewal.
3. Carter’s, Inc. (NYSE:CRI)
Market Cap: $1.91 billion
Forward P/E: 9.96
Number of Hedge Fund Holders: 30
Carter’s, Inc. (NYSE:CRI) is all about babies and young kids. It manufactures and sells apparel and related accessories for this age group under its vast portfolio of brands, including Carter’s, OshKoshB’gosh, Precious Firsts, Just One You, Child of Mine, Simple Joys, and Skip Hop.
The company exceeded its fiscal Q3 2024 sales and earnings objectives, as its US retail sales surpassed expectations due to the strength of its product offerings and the effectiveness of its brand marketing strategies and pricing. In July, Carter’s, Inc. (NYSE:CRI) initiated a plan to invest around $40 million in more competitive pricing and $10 million in additional brand marketing. Coupled with better online and in-store shopping experiences, these investments significantly improved the company’s US retail sales. It saw improving trends in unit volume, conversation rates, transactions, and new customer acquisition.
Carter’s, Inc. (NYSE:CRI) holds a competitive market advantage as the largest supplier of young children’s apparel to big brand retailers. It is thus benefiting from consumers preferring one-stop shopping experiences in big brand retailers in this inflationary cycle. Looking forward, the company’s growth strategies are focused on the fundamentals, which include improving the value and style of its product offerings, improving its marketing effectiveness and capabilities, and leveraging its multi-channel market presence to boost the reach of its brands. The strength of its high-margin business model and cash flow generation lend it the resources to invest in its growth strategies. The company ranks third on our list of the 10 most undervalued small-cap stocks to invest in.
Palm Valley Capital Fund stated the following regarding Carter’s, Inc. (NYSE:CRI) in its Q4 2024 investor letter:
“The three positions contributing most negatively to the Fund’s fourth quarter return were the Sprott Physical Silver Trust (ticker: PSLV), ManpowerGroup (ticker: MAN), and Carter’s, Inc. (NYSE:CRI). Carter’s stock declined during the quarter even after posting stronger than expected operating results. While Carter’s retail business showed signs of improvement last quarter, sales remained under pressure. Management believes inflation has reduced young parents’ discretionary income and ability to spend on children’s clothing. Carter’s has responded by lowering prices at its stores, which has turned volumes positive but reduced profit margins. While the company maintained its profit guidance for the year, margins will likely remain below average, given weak consumer spending and higher promotions. We do not expect business conditions to improve in the near term, but we believe Carter’s depressed stock is trading at an attractive discount to our calculated valuation. The shares are priced at 11x 2024 estimated earnings and offer a 5.9% dividend yield.”
2. Silicon Motion Technology Corp. (NASDAQ:SIMO)
Market Cap: $1.89 billion
Forward P/E: 16
Number of Hedge Fund Holders: 34
Silicon Motion Technology Corp. (NASDAQ:SIMO) develops, manufactures, and supplies semiconductor products for the electronics market. Its products include Storage Solutions, Flash Controllers, and others. The company offers embedded graphics, embedded and expandable storage, and radio frequency integrated circuits. It was founded in 1995 and is headquartered in Hong Kong.
2024 was an exceptional year for Silicon Motion Technology Corp. (NASDAQ:SIMO). It delivered 25% year-over-year revenue growth, outperforming its end market. Its gross margin also improved to over 46% from 43%, and its operating margin grew 11.9% compared to 2023. Simultaneously, the company continued investing in next-generation solutions to expand its opportunities for long-term share gains and sustainable revenue growth.
Despite weak end-user demand in the second half of 2024, Silicon Motion Technology Corp. (NASDAQ:SIMO) remained focused on its execution and taped out several advanced controller replacements that led to significant new project wins with customers. The company also successfully entered the enterprise SSD market, adding six customers to its portfolio and beginning the initial shipment of its first new Mount Titan product in the second half of 2024. Since the PC and smartphone market is expected to remain significant, the company’s strategy to diversify its enterprise is off to a strong start and is anticipated to scale over the next few years.
Focus Capital Management stated the following regarding Silicon Motion Technology Corporation (NASDAQ:SIMO) in its Q4 2024 investor letter:
“Silicon Motion Technology Corporation (NASDAQ:SIMO) designs and sells controllers that manage the NAND flash memory ubiquitous in modern computing. Wherever there is NAND flash, there must be a controller, often one from Silicon Motion. SIMO is an ADR (American Depository Receipt) trading on the NASDAQ.
2024 — Growth Across the Board: We just recently discussed at some length in our third quarter letter about Silicon Motion’s strengthening industry position, increasing market share, and growing revenue and margins. Over 2024, revenue has grown 25%+, gross margin has expanded 500 basis points, and net income has about doubled. We will not repeat our points from there at length. We will simply suffice with saying that the future looks even brighter, with continued growth in their core market segments as well as significant growth from their entry into new market segments. Silicon Motion’s entry into the high-end PC market with their PCIe 5.0 controllers is off to a very strong start with major design wins. In fact, Silicon Motion has stated that based on their present design win pipeline, they expect to attain about 50% market share in the high-end PC segment over the next few years, from their present standing start. And their MonTitan enterprise controllers for AI and data centers have already garnered multiple Tier 1 customer wins, with more expected to come, in what is again a greenfield opportunity for the company…” (Click here to read the full text)
1. Garrett Motion Inc. (NYSE:GTX)
Market Cap: $1.96 billion
Forward P/E: 8
Number of Hedge Fund Holders: 34
Based in Switzerland, Garrett Motion Inc. (NASDAQ:GTX) is a Switzerland-based automotive technology company specializing in turbocharging and electric boosting technology for vehicles. It designs and manufactures turbochargers, which increase engine power output by forcing more air into the combustion chamber. The company produces turbochargers for engines powered by gasoline, diesel, natural gas, and even hybrid or fuel cell systems. In addition, it provides services and products for the connected vehicle market, including integrated vehicle health management (IVHM) and software focused on automotive cybersecurity.
The company has numerous R&D centers, engineering facilities, and factories worldwide. It also boasts a large distribution network and maintains strong partnerships with global and Chinese automakers through its diverse range of turbocharging solutions. Despite a challenging market environment, Garrett Motion Inc. (NASDAQ:GTX) reported robust financial results in fiscal Q3 2024. Although net sales were down from last year due to industry softness and competitive pressures on global OEMs, it delivered a strong adjusted EBITDA margin of 17.4%. This reflects a notable year-over-year improvement driven by the successful implementation of sustainable fixed-cost actions and investments in new technologies.
Garrett Motion Inc. (NASDAQ:GTX) is seeing accelerating momentum in zero-emission vehicle technologies, directing more than half of all its R&D spending in 2024 toward it and earning a bullish analyst sentiment. In September 2024, Garrett Motion Inc. (NASDAQ:GTX) signed a letter of intent with SinoTruk to boost cooperation on electric commercial vehicles. Both companies aim to jointly co-develop a leading next-generation electric powertrain and mass-produce e-trucks equipped with this next-gen E-powertrain by 2027. This alliance is expected to expand the adoption of zero-emission technologies in China’s commercial vehicle market.
Alluvial Capital Management stated the following regarding Garrett Motion Inc. (NASDAQ:GTX) in its first quarter 2024 investor letter:
“Garrett Motion Inc. (NASDAQ:GTX) delivered nice results in February. The company issued strong guidance for 2024 and best of all, indicated it would use nearly all its 2024 free cash flow to repurchase stock. The company wasted no time, buying back a whopping 10 million shares for $90 million on March 6. Garrett will continue to harvest the cash flows from its dominant turbochargers business, investing in creating products for electric vehicles and returning excess cash to shareholders. Investors seem to be waking up to the reality that while electric vehicles are a near-inevitability, it will be a long time still before internal combustion engines lose their relevance. By the time they do, Garrett Motion will have completed the transition to an electric vehicle equipment manufacturer and will have returned billions in capital to investors.”
Overall, GTX ranks first among the 10 most undervalued small-cap stocks to invest in. While we acknowledge the potential of undervalued small-cap stocks, 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 GTX but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: 8 Best Wide Moat Stocks to Buy Now and 30 Most Important AI Stocks According to BlackRock.
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