In this article, we will talk about the 7 best small company stocks to invest in.
Rate Cuts Could Boost SMid-Cap Companies
The Fed’s decision to cut interest rates by 50 basis points in September significantly impacted the market. This decision, motivated by concerns about the labor market’s health, is part of a broader plan to lower interest rates over the next few years. While some analysts believe a 50-basis point cut is too aggressive, others argue it could benefit small and mid-cap stocks.
The Dow Jones Industrial Average also recently reached a new all-time high, indicating strong investor confidence. However, experts believe that small-cap stocks offer significant growth potential, and despite their recent underperformance compared to high-risk investments, small-cap stocks are expected to outperform large-cap stocks shortly.
We went over the anticipated high returns from small-cap stocks in greater detail in one of our other articles, 10 Best Performing Small-Cap Stocks in 2024, where we discussed Richard Bernstein’s opinion, who is the CEO of Richard Bernstein Advisers currently. Here’s an excerpt from that article:
“He elaborated on his bullish stance regarding mid-cap and small-cap stocks, emphasizing that these categories are expected to experience substantial earnings growth. By the end of this year or early next year, Bernstein forecasts that small caps will grow at a rate significantly higher than the MAG 7 tech stocks. He pointed out that this phenomenon is typical when profit cycles hit a trough; small caps tend to be more sensitive to upturns in profitability, and noted the Fed’s current easing policies are occurring simultaneously with an environment of accelerating profits, an unusual combination that could fuel economic growth.
When asked about the current market dynamics favoring mega-cap stocks over smaller ones, Bernstein acknowledged that many managers are indeed gravitating towards these larger companies. However, he cautioned that from a fundamental investment perspective, mega-cap stocks are generally slower-growing and more expensive compared to other market segments. He argued that historically, a combination of cheaper and faster-growing stocks has proven to be advantageous for investors.”
The misallocation of capital towards less productive areas can create inflationary pressures and hinder economic growth. The overall sentiment is that investors should be cautious and focus on small and mid-cap stocks that could benefit from a lower interest rate environment. Pausing and looking into diversification are the best options right now, instead of making impulsive decisions that could backfire in a highly volatile environment, until the economic outlook becomes clearer.
In a recent discussion, Curtis Nagel, senior US SMid cap internet analyst at BofA Securities, joined ‘The Exchange’ at CNBC on September 28, to discuss how rate cuts could impact small and mid-caps companies (or SMid cap companies), and where to find opportunity.
Curtis Nagel shared his insights on the performance and potential opportunities in small and mid-cap stocks following the Fed’s rate cut. While the Russell 2000 index has underperformed the major averages since the rate cut, he believes this could spell big opportunities for SMID-cap stocks across various sectors, including home furnishings and subscription services.
Nagel specifically pointed out Restoration Hardware, noting that it is a household name that often flies under the radar. He mentioned that it reported its results a couple of weeks ago, which came in slightly below guidance. However, the key takeaway was that demand for their products is beginning to accelerate at a notable rate. This uptick is attributed to several factors: it is launching new products, reaccelerating its gallery growth, and maintaining a strong presence in the premium segment of the real estate market. Unlike some of its competitors, it is starting to gain market share, which Nagel believes is crucial for investor sentiment toward the company.
When asked about the volatility associated with it, Nagel acknowledged that it can be a wild stock in terms of performance. However, he emphasized that the company has undergone a significant product transformation and is reinvesting in marketing through its sourcebooks. The resurgence of gallery growth is historically important for its expansion strategy. He believes that with these factors combined, market conditions and unique company attributes, it should continue to perform well.
Nagel’s overall thesis focuses on updating price targets for companies with high sensitivity to interest rates and strong prospects for revenue and earnings growth in a soft landing scenario. ACV Auctions was highlighted as an intriguing opportunity. Nagel described it as a digital marketplace for wholesale vehicles where dealerships trade cars. He noted that this market has not been fully digitized yet, placing the company at the forefront of this transition. Although the wholesale vehicle market has faced challenges, down about 25% relative to historic averages, Nagel theorized that as interest rates improve and car affordability increases, the company could see a market rebound. He views this stock as potentially overlooked but having significant upside.
Overall, he is updating his price targets and raising them on companies with the highest rate exposure and the best opportunity for revenue and earnings upside in a soft landing scenario. He sees SMID-cap stocks as an area of potential opportunity for investors. In that context, we’re here with a list of the 7 best small company stocks to invest in.
Methodology
For this article, we have defined small-cap stocks as those trading between $1 billion and $10 billion. We used the Finviz stock screener and sorted our screen by market cap. We looked through the top 20 stocks that matched our criteria. We then selected 7 stocks that were the most popular among elite hedge funds and that analysts were bullish on. The stocks are ranked in ascending order of the number of hedge funds that have stakes in them, as of Q2 2024. The hedge fund data was sourced from Insider Monkey’s database which tracks the moves of over 900 elite money managers.
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).
7 Best Small Company Stocks To Invest In
7. KBR Inc. (NYSE:KBR)
Market Capitalization as of September 27: $8.51 billion
Number of Hedge Fund Holders: 56
KBR Inc. (NYSE:KBR) operates in the fields of science, technology, and engineering, working in markets like aerospace, defense, industrial, and intelligence. It offers engineering, procurement, construction, and maintenance services for projects such as oil and gas pipelines, refineries, and petrochemical plants, as well as technical solutions and support services to government agencies, including the US Department of Defense.
The company is leading the green ammonia market with 10 projects, including a first in India. While blue ammonia is more prevalent due to affordability, its technology is at the forefront of both blue and green ammonia production. There are only two blue ammonia projects in the world that have FID’d, final investment decision, both are using KBR Inc.’s (NYSE:KBR) technology.
The expertise in these areas, combined with a 5-year contract made in late September with the Iraqi government, solidifies its strong position in the energy transition. It also secured new contracts, including a significant win on the B52 program. Management anticipates a surge in award volume in Q3. It won two large multiple-award contracts, including one with a new customer.
Revenue for Q2 2024 rose 5.82% year-over-year, recording $1.86 billion in revenue. For government, revenue grew by 3%, with growth in international defense and intelligence and science and space (up 11%, 5%, and 1% respectively). However, Funding delays related to the Ukraine conflict have impacted readiness and sustainment activities, leading to a contraction in this segment.
Employee engagement soared 10% this year, reaching a record high of over 70%. It is also certified as a Great Place to Work in 13 countries, with 84% of employees recommending the company to friends. The commitment to inclusion is evident, with 85% of employees feeling valued and heard.
It’s a strong investment choice due to its diversified business model. The company’s strategic focus on high-growth markets and its ability to capitalize on the energy transition position it for continued success.
Cove Street Capital Small Cap Value Fund stated the following regarding KBR, Inc. (NYSE:KBR) in its Q2 2024 investor letter:
“On the plus side, KBR, Inc. (NYSE:KBR) has been a strong performer so far YTD on the back of an investor day in the second quarter that highlighted the success of the last four-year plan (2020-2023) before laying out ambitious but credible targets for the next 4 years (2024- 2027). Since 2020, KBR has pivoted their commercial business away from high-risk EPC projects to a more differentiated IP-first consulting approach that now sees 20% EBIT margins and contributes 40% of their overall profitability. KBR has cleaned up their balance sheet by settling convertible notes and warrants and now sits at a healthy 2x net leverage. With the upcoming ramp of a $20B government services contract with the U.S. army, the company is well positioned to generate cash and return value to shareholders.”
6. Chord Energy Corp. (NASDAQ:CHRD)
Market Capitalization as of September 27: $8.03 billion
Number of Hedge Fund Holders: 56
Chord Energy Corp. (NASDAQ:CHRD), formerly known as Oasis Petroleum, is engaged in hydrocarbon exploration and hydraulic fracturing in the Williston Basin in North Dakota and Montana. It is an independent energy company focused on acquiring and developing oil and natural gas properties, committed to maximizing shareholder value through efficient exploration, development, and production of oil and natural gas resources.
The company has been actively strengthening its business as it seeks to improve revenue streams. It completed the acquisition of Enerplus, which was first announced in February, solidifying its presence in the Bakken region. This merger, valued at ~$11 billion, is expected to deliver increased annual synergies and enhance free cash flow. The transaction received shareholder approvals in mid-May, closing the deal officially at the end of May.
The revenue generated in the second quarter of 2024 was $1.26 billion, up 38.22% year-over-year. Integration is progressing well, exceeding synergy targets. By combining best practices and leveraging increased scale, management is confident in achieving synergies exceeding $200 million. The Williston Basin remains attractive due to its high oil cut, the company’s expertise, favorable conditions, and improved oil takeaway.
The company’s inventory currently includes approximately 40% longer laterals, and it anticipates significantly increasing this percentage in the coming years.
The quarter exceeded expectations due to improved performance and reduced downtime, leading to strong financial results. The company will continue its capital expenditure plans and optimize its development program, adjusting the oil production forecast and investing in high-quality assets. All of these plans position Chord Energy Corp. (NASDAQ:CHRD) for sustainable long-term growth.
Madison Small Cap Fund stated the following regarding Chord Energy Corporation (NASDAQ:CHRD) in its first quarter 2024 investor letter:
“Our Energy underweight was also a slight drag, although we are optimistic about our singular investment in this sector with Chord Energy Corporation (NASDAQ:CHRD). During Q1 the company announced a strategic combination with Canadian-based Enerplus Corporation (TSX: ERF). Enerplus is one of, if not the best remaining assets in the Bakken and we are very constructive on the financial and strategic merits of this transformational deal. CHRD will become the largest operator in the Bakken, representing about 12% of the basin’s production. With a solid balance sheet post deal, CHRD will now be in the enviable position of either the basin’s main consolidator or most strategic asset as a target for larger E&P companies.”
