In this article, we will take a detailed look at ten small cap stocks with high potential.
As we transition from a tumultuous summer in the financial markets, characterized by rising expectations for interest rate cuts and the consequent impacts on stock and bond performances, investors are now navigating a landscape of heightened volatility and uncertainty. The small-cap segment of the stock market has garnered increasing attention in 2024, as expectations of a shift in monetary policy continue to evolve. Since early July, smaller companies have notably outperformed their larger peers, signaling a robust appetite for these stocks despite ongoing economic uncertainty. This trend has spurred interest among investors looking for high-growth potential opportunities within a more volatile market environment.
Nancy Prial, Co-CEO and Senior Portfolio Manager at Essex Investment Management, shared her optimistic outlook for small cap stocks in a recent interview with CNBC on September 30. Prial expects small cap stocks to gain momentum as a result of the rate cuts that have already occurred and additional expected reductions. According to Prial, small-cap stocks remain under-owned in the market and represent only a small percentage of the overall equity market. She highlighted that the conditions are ripe for a strong performance by smaller companies, provided there is a confidence boost from navigating a soft landing rather than a recession.
Prial emphasized that stock selection will be critical in this environment, as not all small-cap stocks are likely to benefit from rate cuts equally. She anticipates that some small-cap companies could see earnings growth in the range of 15% to 20% next year, driven by strong fundamentals and growth-oriented business models. According to Prial, while the broader indices may not deliver the same level of returns, select companies within the segment have the potential to outperform significantly.
As the outlook for the small-cap market brightens, sectors like technology are also poised to benefit from advancements in artificial intelligence and automation. Prial mentioned that these areas could drive innovation and growth within the small-cap segment, offering compelling opportunities for investors. With clear signals from central banks and ongoing technological developments, smaller companies are positioned to capitalize on emerging trends, making them an attractive option for those seeking to diversify and tap into high-potential stocks in the final quarter of the year.
Tom Lee, Head of Research at Fundstrat Global Advisors, echoes a similarly bullish sentiment. Lee believes that the recent volatility in small-cap stocks is part of a multi-year bottoming process, driven by economic data and investor expectations. Despite the unpredictability, Lee expects a significant rally in small-cap stocks once there is clarity on the rate cut cycle. He notes that small caps, which typically trade at 10 times forward price-to-earnings ratios, offer better earnings growth prospects than many mega-cap growth stocks. For Lee, the easing of monetary policy and improving fundamentals make small caps a compelling buy, even in the face of near-term volatility.
One of the primary drivers behind the renewed interest in small-cap stocks is the anticipated easing of monetary policy by central banks. As inflation cools down and economic growth slows, analysts widely expect a series of rate cuts in the coming months. Lower borrowing costs would benefit small-cap companies, which often rely on traditional bank loans instead of accessing corporate bond markets like their larger counterparts. As a result, smaller companies are likely to benefit more directly from the expected rate cuts, making them appealing investment opportunities as the economy starts to recover.
While optimism is building, investing in small-cap stocks does come with risks. A significant portion of these companies have reported negative earnings over the past year, emphasizing the need for a selective approach. Analysts recommend focusing on profitable sectors such as financials, utilities, and consumer discretionary, which have shown resilience despite economic headwinds. Financials, for instance, have delivered robust earnings, while utilities have performed well, although they represent a smaller portion of the market capitalization.
By diversifying portfolios with strategically selected small-cap investments and leveraging the stabilizing power of bonds, investors can position themselves to not only weather market fluctuations but also thrive in the evolving economic environment. The remainder of 2024 could very well be a pivotal period for small-cap stocks, providing opportunities for those willing to embrace the associated risks and rewards.
Our Methodology
For this article, we used the Finviz screener and identified 20 stocks with market cap of less than $2 billion and having Buy or Buy-equivalent ratings and traget price 40% above current price from analysts as of October 5. These stocks have also gained more than 100% in value year to date in 2024. Next, we examined Insider Monkey’s data on 912 hedge funds as of Q2 2024. We narrowed down our list to 10 stocks most widely held by institutional investors and ranked them in ascending order of the number of hedge funds that have stakes in them as of Q2 of 2024.
At Insider Monkey we are obsessed with 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. NANO Nuclear Energy Inc. (NASDAQ:NNE)
Number of Hedge Fund Holders: 2
Market Cap as of October 5: 584.22 Million
Average Analysts’ Target Price as of October 5: $39
Year to date Share Price Gain: 273.60%
NANO Nuclear Energy Inc. (NASDAQ:NNE) is a promising microreactor technology company that has made significant strides in the advanced nuclear energy sector since its inception in 2021. As a developer of cutting-edge microreactor solutions, the company is working on two innovative reactor designs: ZEUS, a solid-core battery reactor, and ODIN, a low-pressure coolant reactor. NANO Nuclear Energy Inc. also aims to establish a high-assay low-enriched uranium (HALEU) fabrication facility to support the growing needs of the nuclear reactor industry. Despite being in its early stages, the company’s robust development strategy and strong financial foundation position it well for future growth.
For the second quarter and six months ended March 31, 2024, NANO Nuclear Energy Inc. (NASDAQ:NNE) reported a net loss of $1.68 million and $2.99 million, respectively, compared to $1.52 million and $2.2 million for the same periods in 2023. The increased losses are attributable to higher research and development (R&D) expenses as the company accelerated the acquisition and development of new technology, including the ALIP technology, which drove R&D costs up by 205% year-over-year. Despite these losses, NANO Nuclear Energy Inc. (NASDAQ:NNE) remains financially strong, with working capital of $12.5 million as of June 30, 2024, ensuring it has the liquidity to support its ongoing projects.
The company also raised approximately $18 million through a public offering in July 2024, further solidifying its cash position and enabling it to fund the next phases of its development. Management has outlined a clear roadmap, estimating that the prototype for its microreactors will be developed between 2024 and 2027, with commercial launches anticipated around 2031. The potential reduction in licensing time through legislative support such as the Advance Act could accelerate these timelines, presenting additional upside potential for investors.
While the company has yet to generate revenue, its strategic investments in R&D and fuel fabrication, combined with exclusive technology licenses, position NANO Nuclear Energy Inc. (NASDAQ:NNE) as a strong player in the emerging small-cap nuclear energy sector. With a strong cash position and a clear path to commercialization, NANO Nuclear Energy Inc. (NASDAQ:NNE) is a small-cap stock worth watching for long-term growth potential.
09. Perpetua Resources Corp. (NASDAQ:PPTA)
Number of Hedge Fund Holders: 7
Market Cap as of October 5: 588.83 Million
Average Analysts’ Target Price as of October 5: $13.54
Year to date Share Price Gain: 187.54%
Perpetua Resources Corp. (NASDAQ:PPTA) is an emerging mining company focused on developing mineral properties in the United States, making it a strong candidate for the list of small-cap stocks with high potential. The company is primarily engaged in exploring and developing its 100%-owned Stibnite Gold Project, which is located in Idaho and consists of a significant number of unpatented lode claims, mill sites, and land holdings. This project is one of the largest and highest-grade open-pit gold mines in the country, and Perpetua Resources Corp. (NASDAQ:PPTA) is also poised to be the only domestic source of antimony, a critical mineral for the U.S. defense and renewable energy sectors. Given its unique position and strategic assets, Perpetua Resources presents an intriguing investment opportunity.
Perpetua Resources Corp. (NASDAQ:PPTA) recently reported its financial results for the second quarter of 2024, showcasing several positive developments. The company announced a smaller-than-expected loss per share of $0.06, beating analysts’ expectations by $0.02. Though Perpetua Resources Corp. (NASDAQ:PPTA) is still in its pre-production phase and has not yet generated any revenue, it has made significant progress in advancing the permitting and construction readiness of its Stibnite Gold Project.
One of the highlights of the quarter was Perpetua Resources Corp. (NASDAQ:PPTA) receipt of an additional $34.4 million in funding through a modified Technology Investment Agreement (TIA) under Title III of the Defense Production Act, bringing the total DPA funding awarded to $59.2 million. Additionally, Perpetua Resources Corp. (NASDAQ:PPTA) secured a letter of interest for up to $1.8 billion in financing from the Export-Import Bank of the United States, which underscores the strategic importance of its Stibnite Gold Project. These financial commitments significantly de-risk the project and provide strong support for its future development.
The ongoing environmental permitting process is nearing completion, with a Final Environmental Impact Statement (FEIS) and Draft Record of Decision expected to be published in the third quarter of 2024. As Perpetua Resources Corp. (NASDAQ:PPTA) advances its Stibnite Gold Project, the stock is well-positioned to benefit from its strategic focus on critical minerals, strong financial backing, and commitment to responsible mining practices.
