In this article, we will take a detailed look at the 10 Small-Cap Stocks Jim Cramer is Talking About.
Earlier this month Jim Cramer talked about the rally in the small-cap-heavy Russell 2000 Index, saying these kinds of rebounds show you have to “stay invested” in the market to make “big money.”
“When I say stay in I mean you have to be as invested as you possibly can be so you don’t miss monster moves.”
Cramer said the Russel 2000 index rally was led by several “oddball” stocks that many people aren’t aware of.
“The biggest winners in the Russel today are all the companies I either don’t know or I barely heard of. You know I know thousands of stocks!”
Cramer highlighted that almost half of the stocks rising in the Russel 2000 index were biotech or healthcare companies that are losing money. Cramer believes these companies might be worth something only “years from now” and called them “risky” stocks.
Jim Cramer talked about what he called “small- and medium-sized businesses” which he believes can benefit from two possible developments in the near term: a Trump win in the election and rate cuts. A Donald Trump presidency, according to Cramer, could provide a level-playing field for these small companies which often get left behind by major companies amid tough regulation. Since Trump is expected to decrease regulations if he comes to power, these small companies could thrive in this new environment. Cramer said that money is coming from the “sidelines” as investors begin to invest in stocks instead of hoarding cash to earn interest income.
Cramer has been talking about several small-cap stocks in his programs lately. In a recent program, he mentioned several small-cap stocks that were moving recently and briefly discussed their businesses. We picked these stocks and analyzed their fundamentals and growth potential. We also mentioned hedge fund sentiment around these stocks. 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. SPX Technologies Inc (NYSE:SPXC)
Number of Hedge Fund Investors: 19
SPX Technologies Inc (NYSE:SPXC) is a heating, ventilation, and air conditioning, detection and measurement, power solutions company. Cramer mentioned that the stock trades 28 times earnings and said “no thanks.” Cramer said he prefers Carrier Global instead.
Oppenheimer also downgraded the stock to Perform from Outperform citing valuation concerns. The firm believes SPX is now fairly valued.
Over the past one year, the stock has gained about 80% in value. Oppenheimer said:
“The stock’s significant trailing outperformance has driven valuation to levels that seem to fairly reflect SPX’s (SPXC) compounder trajectory. Given the recent step change in buyside expectations and corresponding impact on margin of safety, we move to the sidelines (for now) on one of our favorite long-term stories.”
What’s propelling this stock growth? HVAC is the answer. During the first quarter, SPX Technologies Inc (NYSE:SPXC) HVAC segment revenue grew 20% and backlog growth in the segment also came in at 20%. HVAC business accounts for about 69% of group revenue and has the potential for improved margins. Last year’s EBIT margin was 21%, and operational initiatives could boost this to 25% in the coming years. A key strength of the HVAC segment is the high-margin replacement revenue from spare part sales, which make up about two-thirds of segment sales. SPX Technologies Inc (NYSE:SPXC) expertise in cooling towers is crucial for data centers, where demand is expected to surge by 160% by the end of the decade due to AI. Last year, 61% of the $1.1 billion HVAC sales were from cooling products. As data centers will need a lot of cooling, the company is positioned well to benefit from this demand. However, the stock’s valuation is now too high and it’d make sense to let the stock cool down itself before piling into it.
9. Ensign Group Inc (NASDAQ:ENSG)
Number of Hedge Fund Investors: 20
Nursing and rehab services company Ensign Group Inc (NASDAQ:ENSG) is one of the top small-cap stocks Jim Cramer is talking about. Cramer said in a latest program that the stock sells for 25 times earnings.
“This one works, too.”
Ensign Group Inc (NASDAQ:ENSG) expects a 13% year-over-year revenue growth in 2024. The company also owns Standard Bearer Healthcare REIT, Inc., which is a captive real estate investment trust that invests in healthcare properties. The REIT has 115 owned properties which are subject to triple net long-term leases.
Ensign Group Inc (NASDAQ:ENSG) is expected to continue growing amid an aging population and demand for skilled nursing and rehab services. During Q2 earnings call the company talked about its expansion and growth in skilled nursing:
“As our operators continue to build on a solid foundation of strong clinical results, cultural excellence and sustainable real estate expenses, we are confident that our partners will continue to capitalize on the occupancy and skilled mix growth inherent in our portfolio, which will allow us to consistently achieve the results that we have delivered over time. Also, as you saw in our press release yesterday, we have been busy acquiring new operations, and our transitioning and recently acquired buckets now represent 27% of our total operational beds. Again, we want to emphasize that this represents massive organic growth potential within those existing growth buckets. To give some perspective, our occupancy and skilled mix days for the skilled nursing operations in the transitioning bucket were 75.7% and 21.7% respectively, while our same-store occupancy and skilled mix days were 80.8% and 31.5% respectively.”
8. Installed Building Products Inc (NYSE:IBP)
Number of Hedge Fund Investors: 22
Installed Building Products Inc (NYSE:IBP) provides waterproofing, fire-stopping, fireproofing, garage doors, rain gutters, window blinds, shower doors, closet shelving solutions. Cramer mentioned that the stock trades about 21 times earnings.
“I still like it.”
Installed Building Products Inc (NYSE:IBP) which also pays a dividend, has grown its revenue at 17% per year on average against a 38% compounding growth in earnings from 2019 through 2023. Some secular growth catalysts for the stock include possible rate cuts which could spark a new activity cycle in the construction industry. The U.S. residential construction market is expected to grow at a 3% annual rate through 2029. The company saw a whopping 27% year-on-year increase in single-family starts in Q1 2024, driven by low existing home inventory.
Installed Building Products Inc (NYSE:IBP) has been able to post strong operating margins when compared with peers. It has a gross profit margin of 26.3% and on average it generated $1.73 in revenue per $1 of capital. This efficiency has become the company’s advantage.
Barclays recently published a list of small-cap stocks with quality and growth characteristics amid the latest market rotation. Installed Building Products Inc (NYSE:IBP) is part of the list.
Baron Real Estate Fund stated the following regarding Installed Building Products, Inc. (NYSE:IBP) in its first quarter 2024 investor letter:
“For example, the shares of Installed Building Products, Inc. (NYSE:IBP), one of the nation’s largest installers of insulation and complementary building products, appreciated by 45.0% during the recent quarter, in part owing to signs that industry conditions in the new single-family residential construction market continue to improve (new single-family residential construction drives approximately 60% of IBP’s revenues).
In addition, IBP is executing superbly across various strategic initiatives to drive growth from other construction end-markets (new multi-family construction, light and heavy commercial construction, remodel construction), improve pricing and profitability, and identify attractive tuck-in acquisition targets…
7. Insight Enterprises, Inc. (NASDAQ:NSIT)
Number of Hedge Fund Investors: 26
Jim Cramer in a latest program explained Insight Enterprises, Inc. (NASDAQ:NSIT) as a company working with information technology and assembly devices including AI devices. Cramer said that the stock trades 20 times earnings and said because it has already jumped significantly, “I can’t play it.”
Insight Enterprises, Inc. (NASDAQ:NSIT) offers hardware, software, and service solutions, including cloud services. Last year, hardware product sales accounted for about 67% of its revenue and the rest came from software.
Value-added resellers (VARs) like Insight Enterprises, Inc. (NASDAQ:NSIT) are expected to see demand as companies scramble to implement AI solutions in their back offices, call centers, services and customer support centers. VARs specialize in procurement, integration, and implementation and have strong OEM connections and expertise to identify the best products for organizational needs.
Another growth catalyst for the company is the upcoming AI PC upgrade cycle. Canalys estimates that worldwide AI PCs will account for around 70% of total PC shipments. Since Insight Enterprises, Inc. (NASDAQ:NSIT) is positioned well in the market due to its hardware business, the company can benefit from this cycle.
6. Mueller Industries Inc (NYSE:MLI)
Number of Hedge Fund Investors: 27
Mueller Industries Inc (NYSE:MLI) is an industry leader in copper and brass extrusion and forming. It makes HVACR products, including insulated duct systems and refrigeration valves. Mueller Industries Inc (NYSE:MLI) makes pipes, tubes and valves for residential and commercial construction markets. About 50% of the company’s sales come from construction plumbing, a third from construction HVAC, with refrigeration, manufacturing, and transportation making up the rest. Jim Cramer in a latest program called Mueller Industries Inc (NYSE:MLI) “cheap” and said that the stock trades 14 times earnings.
“I like it a lot,” Cramer said.
Analysts believe an expected rebound in construction activity and interest rate cuts are upcoming growth catalysts for Mueller Industries Inc (NYSE:MLI) in the short term.
Another solid reason to own Mueller Industries Inc (NYSE:MLI) is its dividend. The company announced a 33% dividend increase earlier this year. It’s been paying regular dividends over the past 20 years.
5. SPS Commerce Inc (NASDAQ:SPSC)
Number of Hedge Fund Investors: 28
Supply chain management software company SPS Commerce Inc (NASDAQ:SPSC) is one of the notable small-cap stocks Jim Cramer talked about recently.
Amid rising e-commerce sales all over the world, SPS Commerce Inc (NASDAQ:SPSC) has growth prospects because its solutions connect retailers, suppliers and carriers. SPS Commerce Inc (NASDAQ:SPSC) has 120,000 customers and 12,000 drop-ship connections. The company posted about 18% revenue growth in the second quarter year over year. For the full year, it expects revenue growth of 16% to 17% over last year. SPS Commerce Inc (NASDAQ:SPSC) is also expanding via acquisitions. It recently announced to buy Traverse Systems, an SaaS platform provider offering retailers and suppliers a unified view of their supply chain performance, for about $29.3 million. Traverse Systems is expected to contribute $5 million in revenue by 2025.
4. Meritage Homes Corp (NYSE:MTH)
Number of Hedge Fund Investors: 28
Jim Cramer mentioned home construction company Meritage Homes Corp (NYSE:MTH) during his program on CNBC. He highlighted that the stock sells 9x earnings. However, he said that the stock has “moved too much” and he prefers Toll Brothers.
Meritage Homes Corp (NYSE:MTH) recently reported strong Q2 numbers. Orders of 3,799 homes for the second quarter of 2024 were 14% higher year over year. The company also upped its full-year guidance. Here is what management said during the latest earnings call:
Given current market conditions, we have revised our full year projections higher to the following: total closings between 14,750 and 15,500 units; home closing revenue of $6.1 billion to $6.3 billion; home closing gross margin around 24.5% to 25%; and effective tax rate of about 22.5%; and diluted EPS in the range of $19.80 to $21 flat.
As for Q3 2024, we are projecting total closings between 3,650 to 3,850 units; home closing revenue of $1.5 billion to $1.6 billion; home closing gross margin of 23.5% to 24%; and an effective tax rate of about 22.5%; and diluted EPS in the range of $4.60 to $5.05. Both Q3 and full year guidance assume current market conditions and interest rates.
Meritage Homes Corp (NYSE:MTH) bulls believe the company’s margin outlook can improve amid easier comparisons, operating leverage, and lower commodity costs. The upcoming interest rate cuts could be a major booster for the stock.
Lumber prices are at record lows and are expected to remain depressed. These factors combined should positively impact Meritage Homes Corp (NYSE:MTH) in the upcoming quarters.
3. ATI Inc (NYSE:ATI)
Number of Hedge Fund Investors: 31
Jim Cramer called ATI Inc (NYSE:ATI) the “best specialty steel company on earth” including stainless and tungsten. Cramer said that much of the company’s steel is used in aerospace.
“I really like it. That’s a small cap you’d want.”
ATI Inc (NYSE:ATI) has revealed $4 billion in new sales commitments through 2040. Out of this, about $2.2 billion of this revenue will be realized by the end of this decade. Most of these contracts are for nickel alloys in the jet engine market.
At the start of the year, ATI Inc (NYSE:ATI) Advanced Alloys and Solutions segment faced demand headwinds but those were offset by strengths in High-Performance Materials and Components segment.
Some other headwinds ATI Inc (NYSE:ATI) is facing are related to 737 Max plans including technical errors and production rate reductions. But analysts believe strong demand in other business segments can offset these in the short term.
ATI Inc (NYSE:ATI) business of supplying specialty materials to major engine and airframe OEMs and is gaining market share all over the world, including Russia. Defense sales are also growing due to strong foreign military sales and new programs like the U.S. Army’s latest armored fighting vehicle.
2. Fabrinet (NYSE:FN)
Number of Hedge Fund Investors: 33
Fabrinet (NYSE:FN) provides advanced optical, electro-mechanical, and electronic manufacturing services. Cramer said the stock jumped after the latest CPI numbers but it has since pared gains. That, according to Cramer, “makes sense” since it’s an outsourcing company and the latest rotation is about the “end of outsourcing.”
Fabrinet (NYSE:FN) makes low volume highly complex products that are unfeasible to produce in-house for OEMs. Its products are used in key industries like automotive and data centers. Fabrinet (NYSE:FN) is a notable player in the optical communication equipment market that is slated to grow at a CAGR of 8.7%.
Fabrinet (NYSE:FN) saw strong revenue growth in the latest quarter amid demand for data communication products.
FPA Queens Road Small Cap Value Fund stated the following regarding Fabrinet (NYSE:FN) in its first quarter 2024 investor letter:
“Fabrinet (NYSE:FN) is a contract manufacturer of components and modules. The company has a dominant position in hard-to-replicate precision-manufacturing technologies and an enviable track record of execution. The majority of Fabrinet’s sales are to networking equipment manufacturers but it has been successfully diversifying into the data center, industrial, auto, and medical end-markets. FN’s stock jumped after reporting June 2023 earnings – datacenter sales increased 50% sequentially and more than 100% over the previous year, driven by their 800-gigabyte transceivers for Artificial Intelligence applications. The company also announced that Nvidia is a 10%+ customer.
Fabrinet was a top-five holding in the Fund before its June 2023 earnings announcement. Since then, the stock has appreciated considerably and we have trimmed in keeping with our risk management policies. Given the growth in its forward earnings estimates, Fabrinet trades in line with its historical earnings multiples and remains a top five position for us.”
1. Comerica Inc (NYSE:CMA)
Number of Hedge Fund Investors: 45
Jim Cramer said in his latest program that many believe Comerica Inc (NYSE:CMA) is the “worst mid-sized bank in the country.”
Cramer highlighted that this stock sells for just 10 times earnings and has a 5.4% dividend yield. He said the company recently reported a “very weak quarter.”
“You don’t want it.”
Comerica Inc (NYSE:CMA) is a Texas-based banking company. The stock suffered as the company saw noninterest-bearing deposit (NIB) outflows, which caused a decline in net income. The company lost its contract for Direct Express debit card contract with the U.S. Treasury, expiring in early 2025. About 86% of its loans are generated in commercial banking. Amid the regional banking crisis, Comerica Inc (NYSE:CMA) took several steps which caused a spike in deposit costs, negatively impacting the bank’s fundamentals. Despite some hedging through interest-rate swaps, Comerica Inc (NYSE:CMA) remains sensitive to rate changes, and expected rate cuts could pressure net interest income by late 2024 or 2025.
Third Avenue Value Fund stated the following regarding Comerica Incorporated (NYSE:CMA) in its fourth quarter 2023 investor letter:
“Apparently, Ms. West never ran a bank. For many financial firms, interest rates are a lot like medicine in that the proper dosage can be salubrious, while too much of the same medicine can prove fatal. Similarly, the way interest rates impact the health of industries and companies can shift meaningfully over time. There are few better examples of this principle than the U.S. regional bank sector and Comerica Incorporated (NYSE:CMA), in particular.
Comerica, a long-time Fund holding, is an unusual super-regional bank due to the extent of corporate exposure in its loan book, as compared to many other U.S. regional banks with much larger exposures to residential mortgages. Because much of this corporate lending is done on a floating-rate basis, Comerica’s asset yields respond unusually rapidly to interest rate movements. As interest rates rose over the last few years, Comerica’s asset yields did indeed rise sharply as well, a very positive development. In this way, Comerica, along with many U.S. regional banks, were rightly perceived as beneficiaries of U.S. interest rates rising from historically low levels. Something similar can be said of our European banking investments where Bank of Ireland and Deutsche Bank have also been aided by rising European rates. However, higher rates were helpful for most U.S. regional banks, until they weren’t. By early 2023, rates had risen high enough, and rapidly enough, to expose a lot of duration risk (the risk associated with the value of longer-dated bonds bearing higher sensitivity to interest rate movements than shorter-dated bonds) present within the huge fixed-income portfolios comprising large portions of many regional bank balance sheets. Ultimately, accelerating deposit withdrawals at a few banks caused high-profile manifestations of this risk, leading to a couple of bank insolvencies, heightened fear, more withdrawals, and a spiral which had to be arrested by the U.S. Federal Reserve, Treasury and FDIC. U.S. regional bank stocks were punished severely during the first half of the year…
While we acknowledge the potential of Comerica Inc (NYSE:CMA), our conviction lies in the belief that under the radar AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than CMA but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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