In this article, we will look at the 7 Best Nano Cap Stocks To Invest In.
What Are the Small Cap Bulls Saying?
In one of our recent articles about 8 Most Undervalued Penny Stocks To Buy According To Analysts, we talked about how many analysts are expecting small caps to perform well in a slowing economy. Here’s an excerpt from the article:
“To talk about what the stock market looks like today and in the near future. Tom Lee, co-founder of Fundstrat Global Advisors joined CNBC in a recent interview. He has been one of the strong proponents and supporters of small-cap stocks. Lee says that we are in a volatile environment currently, due to a few reasons, one being the elections in less than 30 days, the second being the Middle Eastern crisis which is scaring investors, and lastly the port strike that has the potential to cripple the economy. However, he still expressed his optimism that the year-end has a lot of tailwinds and investors shouldn’t be afraid to buy the dip. Moreover, Lee also highlighted that these current events are all short-term headwinds in a buying cycle and are expected to die down quickly.
Lee thinks that bottoms are tough and processed, and small caps are in the process of what could be a multi-year bottom. Therefore the conviction is that some people might want to buy the big names on NASDAQ and the AI market, however, with small caps trading at lower multiples of P/E less than 10, the risk and reward lie in small caps. Lee further mentioned that interest rate cuts and better earnings growth make the path for small-cap growth more visible.”
A few weeks ago, Richard Bernstein, Richard Bernstein Advisors CEO, joined CNBC for an interview to discuss the future of small caps. He mentioned that the reason why he is bullish on mid-caps and small-caps is because he sees earnings growth to be within these segments of the market. The forecasts are showing that small caps are going to grow at a multiple similar to the Magnificent Seven.
Bernstein explained that this is not unusual. When profit cycles take a dip companies have greater sensitivity to upturn and profitability. He mentioned that what’s extraordinary is that the Fed is easing into this accelerating environment, whereas normally, they would be tightening the policy rate. As the profits are expected to go up, the economy is naturally expected to follow, thereby supporting small-cap stocks. On top of that, the interest rates easing adds more fuel for the markets to rally.
Bernstein acknowledged that many investment managers are betting high stakes on the mega-cap stocks. He mentioned that if you are a momentum investor it makes sense to put all your stakes in the Magnificent Seven because that’s where the momentum is currently. However, if you are a fundamental investor it might not make total sense to invest in mega-cap stocks as they are on a slower growth trajectory with expensive prices. Whereas other parts of the market are cheaper and faster growing. Bernstein mentioned, historically speaking, a combination of cheaper and faster-growing stocks, which is how fundamental investors think is a good combination and a viable investment strategy.
Lastly, Bernstein showed his concern regarding speculative behavior, particularly in cryptocurrencies, which may signal potential risks for the economy. Bernstein warned that excessive financial asset inflation can be as damaging as inflation in real assets, leading to misallocation of capital within the economy. For context, asset inflation is what analysts normally refer to as bull markets, meaning that if bull markets continue to persist for an excessive period they create a bubble which leads to speculation and misallocation of cash.
Let’s now look at the 7 best nano cap stocks to invest in.
A financial analyst looking through a microscope at stocks to determine their market value.
Our Methodology
To compile the list of the 7 best nano cap stocks to invest in, we used the Finviz stock screener. We define nano-cap stocks to be those with a market capitalization of $50 million to $250 million. Therefore, we used the screener to find stocks that fit our criteria and then arranged them by market capitalization. Lastly, we ranked these stocks as per the number of hedge fund holders in Q2 2024 according to Insider Monkey’s database. Please note that the market caps were recorded on October 15, 2024. The list is ranked in ascending order of the number of hedge fund holders.
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).
7 Best Nano Cap Stocks To Invest In
7. Enanta Pharmaceuticals, Inc. (NASDAQ:ENTA)
Market Cap: $239.64 Million
Number of Hedge Funds: 15
Enanta Pharmaceuticals, Inc. (NASDAQ:ENTA) is a biotechnology company that focuses on developing small molecule drugs for treating viral infections and immune-related conditions. Their medication caters for Respiratory Syncytial Virus (RSV), Hepatitis C Virus, Hepatitis B Virus (HBV), and COVID-19. They are also exploring treatments for conditions like chronic spontaneous urticaria (CSU).
Enanta Pharmaceuticals, Inc. (NASDAQ:ENTA) is currently in the clinical stage, meaning they are conducting trials to test the safety and effectiveness of their drugs.
As a recent development, the company on September 26th announced positive topline results for EDP-323 in a Phase 2a human challenge study, indicating progress for the company in its efforts to develop effective treatments for RSV. The results demonstrated an 85-87% reduction in viral load and a 66-78% reduction in clinical symptoms compared to placebo.
Other than the EDP-323, the pipeline of the company remains robust with Zelicapavir (EDP-938), which is an N-protein inhibitor currently being tested in two Phase 2 studies targeting high-risk populations, including a pediatric study that focuses on hospitalized and non-hospitalized children aged 28 days to 36 months.
As Enanta Pharmaceuticals, Inc. (NASDAQ:ENTA) is still in the clinical stage, the revenue it generates mainly comes from royalties. The second quarter revenue was $17.1 million, slightly down year-over-year from $17.8 million in 2023. The revenue generation was mainly from the royalties on AbbVie’s MAVYRET sales.
What’s important to note here is that the company has around $300 million in cash and marketable securities, which management believes is enough to fund operations and development till at least the 3rd quarter of fiscal 2027. Enanta Pharmaceuticals, Inc. (NASDAQ:ENTA) is one of the best nano-cap stocks to invest in. It was held by 15 hedge funds in Q2 2024 as per Insider Monkey’s database.
6. Potbelly Corporation (NASDAQ:PBPB)
Market Cap: $245.25 Million
Number of Hedge Funds: 16
Potbelly Corporation (NASDAQ:PBPB) is a fast-casual restaurant chain primarily known for its Potbelly Sandwich Shops across the United States. The company operates a series of sandwich shops offering their signature sandwiches along with various salads, soups, and other sides.
They have around 424 shops in 31 states and the District of Columbia, with a mix of company-owned and franchise locations. Potbelly Corporation (NASDAQ:PBPB) is focused on growing its network of franchises and is also innovating its shops to make them smaller to reduce expenses.
During the second quarter of 2024, it announced adding 22 new franchises and 9 new shop openings. The overall revenue for the company came in at $119.7 million, which was down 5.5% year-over-year due to last year’s refranchising efforts. However, on the bright side, the franchising efforts are paying off well for the company as the franchise revenue surged by 117% to $4.2 million, driven by a 53% increase in franchise units. Moreover, the Average Weekly Sales (AWS) was also up 0.6% year-over-year indicating that each store is showing considerable improvement.
Looking ahead, Potbelly Corporation (NASDAQ:PBPB) aims to open at least 30 new shops during the rest of the year and achieve adjusted EBITDA of $27 million to $30 million.
Next Century Growth Investors Micro-Cap Strategy stated the following regarding Potbelly Corporation (NASDAQ:PBPB) in its first quarter 2024 investor letter:
“Potbelly Corporation (NASDAQ:PBPB) is a fast casual sandwich shop with 430 stores in the US. The company has been around for nearly 50 years and has been public since 2013. The growth story was challenged for many years after going public. However, the company hired a new management team which has improved all facets of existing store operations and they are now getting back into store growth mode. Currently around 70 of the 430 stores are franchises and this will be the primary focus of store growth in the future. The company believes they can have >2,000 stores in the US with about 85% of stores under the franchise model.”
5. Inspired Entertainment, Inc. (NASDAQ:INSE)
Market Cap: $239.71 Million
Number of Hedge Funds: 16
Inspired Entertainment, Inc. (NASDAQ:INSE) is a technology company that provides various gaming solutions for businesses. It focuses on creating and supplying games, software, and hardware for casinos, betting platforms, and other online operators. Their software and games also allow businesses to provide sports betting options. The company has a global reach in over 35 countries with more than 50,000 gaming machines installed internationally.
Inspired Entertainment, Inc. (NASDAQ:INSE) in recent development announced securing a licensing agreement with the National Hockey League (NHL), which will significantly enhance its portfolio of virtual sports offerings. The deal allows the company to develop interactive, fixed-odds virtual sports games that feature NHL branding, including team logos and jerseys, thereby enhancing the existing range of sports-themed gaming options.
During the second quarter of 2024, the company delivered strong results indicating its profitability and strong fundamentals. Its revenue grew 40% during the quarter to reach $75.6 million, primarily driven by a strong performance in its interactive segment. Moreover, net income also came in high at $2 million, with adjusted EBITDA up 69% during the same time.
Looking ahead, management recently announced its upcoming launch of the Hybrid Dealer Roulette game in Canada, in partnership with Loto-Québec. Loto-Québec will be the first operator in Canada to offer this innovative game, marking a significant milestone for Inspired as it expands its presence in the Canadian gaming market.
With a market capitalization of around $240 million at the time of this writing, Inspired Entertainment, Inc. (NASDAQ:INSE) is the 5th best nano-cap stock to invest in.
4. Kyverna Therapeutics, Inc. (NASDAQ:KYTX)
Market Cap: $242.05 Million
Number of Hedge Funds: 17
Kyverna Therapeutics, Inc. (NASDAQ:KYTX) is a clinical-stage biopharmaceutical company that focuses on developing cell therapies for autoimmune diseases. KYV-101 is one of the leading therapies of the company, which is made from patients’ T-cells to target and eliminate harmful cells in the body. The company is involved in various clinical trials to test the safety and effectiveness of its therapies.
Kyverna Therapeutics, Inc. (NASDAQ:KYTX) is making significant strides in developing its lead product candidate, KYV-101, a CAR T-cell therapy aimed at treating autoimmune diseases. CEO, Peter Maag mentioned that the company demonstrated promising initial safety and efficacy results for KYV-101, which targets B cells using a fully human CAR designed to enhance tolerability.
During the second quarter of 2024, the company presented data from 50 patients with 15 different autoimmune conditions, showing that KYV-101 effectively depletes B cells without severe side effects. Moreover, it also received two Regenerative Medicine Advanced Therapy (RMAT) designations from the FDA for KYV-101, specifically for treating Stiff-Person Syndrome and myasthenia gravis.
The company ended the second quarter with cash reserves of $346.2 million and is actively recruiting patients for ongoing trials and plans to share more clinical data throughout 2024. It is one of the best nano cap stocks to invest in as it was held by 17 hedge funds in Q2 2024 as per Insider Monkey’s data.
3. James River Group Holdings, Ltd. (NASDAQ:JRVR)
Market Cap: $244.76 Million
Number of Hedge Funds: 19
James River Group Holdings, Ltd. (NASDAQ:JRVR) is an insurance company based in Bermuda that primarily focuses on specialty insurance. The company owns and manages several specialized insurance companies, through which it engages in underwriting and investment returns. They specialize in providing tailored insurance solutions for unique risks that typical insurance companies might not cover adequately.
The second quarter of 2024 came in with significant highlights for this $244.76 million nano-cap company. James River Group Holdings, Ltd. (NASDAQ:JRVR) net income for the quarter improved 24.7% year-over-year to reach $11.85 million. The growth was driven by the casualty underwriting division which improved 5.3% when compared to the same quarter last year. Moreover, the general casualty division also witnessed a 14.6% growth.
The E&S Segment experienced an average renewal rate increase of 9.1%, indicating that existing clients are paying more to renew their policies. Due to increasing competition and more available insurance capacity, the company has become more selective in its excess property insurance offerings, resulting in a 27.9% decline in gross written premiums for this line. However, despite the decline, the overall gross written premium for the E&S segment increased by 2.3%, supported by stable growth rates in most casualty divisions and strong submission flows.
The second quarter results indicated that James River Group Holdings, Ltd. (NASDAQ:JRVR) is strategically adjusting as per the market conditions while aiming to maintain profitability across its insurance segments.
Bernzott Capital Advisors US Small Cap Value Fund stated the following regarding James River Group Holdings, Ltd. (NASDAQ:JRVR) in its fourth quarter 2023 investor letter:
“Our position in James River Group Holdings, Ltd. (NASDAQ:JRVR) also hurt performance as the stock declined by over 40% following their earnings release, which highlighted adverse reserve developments. They also announced a dilutive sale of their casualty reinsurance segment. We exited the position.”
2. Seritage Growth Properties (NYSE:SRG)
Market Cap: $248.71 Million
Number of Hedge Funds: 22
Seritage Growth Properties (NYSE:SRG) is a real estate investment trust (REIT) that specializes in owning, developing, and managing various types of properties, primarily retail and mixed-use spaces, across the United States. Its portfolio includes interests in over 32 properties with approximately 4.1 million square feet of space available for lease. This includes both wholly-owned properties and those held in partnership with other entities.
The company has been focused on its plan of sale, a strategic initiative aimed at optimizing the company’s asset portfolio and enhancing shareholder value. Under this plan, management aims to gradually sell non-core and underperforming assets to generate cash proceeds. As of the second quarter of 2024, the company had accepted offers totaling over $150 million in gross proceeds from various property sales.
Seritage Growth Properties (NYSE:SRG) generated a total of $40.4 million from gross sales proceeding, which included $28.0 million from Multi-Tenant Retail assets, $3.8 million from Non-Core assets, and $8.3 million from two vacant/non-income producing Non-Core assets.
As of August, the company had five assets under contract, expected to yield $138.6 million in gross proceeds. It ended the quarter with $100.5 million cash and paid $50 million in debt repayment bringing its balance to $280 million.
Management plans to continue marketing additional assets based on market conditions, with anticipated sales occurring in 2024 and beyond.
O’keefe Stevens Advisory made the following comment about Seritage Growth Properties (NYSE:SRG) in its Q3 2022 investor letter:
“Seritage Growth Properties (NYSE:SRG) – A good idea on paper, hard to execute in practice. When we made our initial purchase in 2018, we thought the idea of repurposing existing Sears and Kmart properties at below-market rents into modern spaces, enabling the company to charge multiples of the prior rent, made sense. Increasing rents from $5 to $20 PSF with a 10-11% ROI seemed like a nobrainer. The return profile made sense, and applying moderate leverage to stabilized properties improved end economics. Multiple changes at the management level and a $1.44B loan from Berkshire with a 7% interest rate and covenants (yes, those still exist) made this an impossible endeavor. We thought partnering with Eddie Lampert would align our interests and prove an intelligent decision, given the capital and brain power he has put into this situation.
On paper, selling non-core assets and using the proceeds to fund Capex plans and ongoing corporate expenses makes sense. The problem is the number of properties the company needed to sell for this business model to work. Every year that went by materially lowered the company’s value as the interest expense proved to be a heavy burden. The company essentially turned into a death spiral where they were merely selling properties to meet the interest expense and having little remaining for the core part of the business plan. Compiling all this with the lockdowns in 2020 and 2021 and the supply chain mess still being worked through has further delayed this turnaround.
Today the company is much smaller. Seritage once owned 253 properties totaling 39m SF compared to today, where they own161 properties and 19m SF. During this time, they only paid down $100m of the term loan. The turnaround has taken too long, and the company has put itself up for sale. Again, on paper, this seems like a good idea; however, going through a sale of this proportion will take a long time in a calm environment. The rise in interest rates, tight credit markets, and equity market volatility make this a monumental task. I suspect the number of buyers for these properties, which was once small to begin with, is down to a handful. A critical issue with the SRG portfolio is that the assets are spread out across the country. One player is not going to purchase all these assets. Real Estate Developers and owners tend to concentrate their efforts on a single region (excluding the global players such as Blackstone, Simon, and other private equity groups). Seritage may be able to sell some nearby properties as a package but would likely take a discount to FV, or it has to sell each property one by one…(Click here to read the full text)
1. Amylyx Pharmaceuticals, Inc. (NASDAQ:AMLX)
Market Cap: $243.73 Million
Number of Hedge Funds: 26
Amylyx Pharmaceuticals, Inc. (NASDAQ:AMLX) is a biopharmaceutical company that develops treatments for neurodegenerative diseases, which are conditions that lead to the gradual degeneration of the nervous system. They are a commercial-stage company working on two main drugs AMX0035 and AMX0114.
The company has made significant strides in developing treatments for rare metabolic and neurodegenerative diseases, particularly through its acquisition of Avexitide, a promising drug candidate. Avexitide is a GLP-1 receptor antagonist that is ready for Phase 3 clinical trials. It has received both Breakthrough Therapy Designation and Orphan Drug Designation from the FDA for treating conditions related to hyperinsulinemic hypoglycemia.
The company is also advancing its other drug candidate, AMX0035, which is being studied for treating Wolfram syndrome, a rare genetic disorder that leads to severe complications like diabetes and neurodegeneration. Recent data from trials shows promising results.
Amylyx Pharmaceuticals, Inc. (NASDAQ:AMLX) plans to initiate the Phase 3 program for Avexitide in PBH by early 2025, with topline data expected in 2026. This aligns with their commitment to addressing unmet medical needs in these rare medical conditions.
It is one of the best nano cap stocks to invest in and was held by 26 hedge funds in Q2 2024 as per Insider Monkey’s database with stakes totaling $34.39 million. During the second quarter of 2024, the company had $309.8 million in cash, cash equivalents, and short-term investments. Moreover, management expects the cash to be sufficient to fund operations till 2026.
While we acknowledge the potential of Amylyx Pharmaceuticals, Inc. (NASDAQ:AMLX) to grow, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for a promising AI stock that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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