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.”
5. Smartsheet Inc. (NYSE:SMAR)
Market Capitalization as of September 27: $7.69 billion
Number of Hedge Fund Holders: 57
Smartsheet Inc. (NYSE:SMAR) offers a SaaS platform for collaboration and work management, used to assign tasks, track project progress, manage calendars, share documents, and manage other work, using a tabular user interface. It’s a leading provider of cloud-based work management and automation platform, used by businesses of all sizes across various industries, including technology, healthcare, and finance.
It signed new customers like Intuit, Skechers, and City National Bank. There was a recent large deal in FQ2 2o25 with a Big 4 consulting firm to use Smartsheet Inc. (NYSE:SMAR). This customer estimates that Smartsheet Inc. (NYSE:SMAR) saved their team 39,000 working hours, reduced their project delivery costs by ~12%, and grew Smartsheet demand across their organization with users increasing by 120% year-over-year.
This quarter, the company was also able to expand its relationship with a major enterprise customer during its annual renewal. With 150,000+ Smartsheet users, the success was due to differentiated features and enterprise-grade security. Its corporate-level IT and security approval has enabled widespread adoption across the company.
In FQ2 2025, it grew revenue by 17.33% year-over-year, attributed to 77 customers spending over $1 million per year, which is a 50% increase from last year. The annual recurring revenue grew by 17%, and subscription revenue by 19% — revenue from capabilities made up 35% of subscription revenue.
The company also launched its share buyback program and repurchased 918,000 shares for a total of $40 million in the quarter. Strong growth, innovative features, and dedication to customer satisfaction make Smartsheet Inc. (NYSE:SMAR) a promising investment.
TimesSquare Capital Management U.S. Small Cap Growth Strategy stated the following regarding Smartsheet Inc. (NYSE:SMAR) in its Q2 2024 investor letter:
“Among the wide variety of Information Technology companies, we prefer critical system providers, specialized component designers, systems that improve productivity or efficiency for their clients, and others that closely tie to increasing shares of corporate IT budgets. Smartsheet Inc. (NYSE:SMAR) offers an enterprise platform to plan, capture, manage, automate, and report on work for teams and organizations. They reported a strong quarter with upsides to revenues, subscriptions, and free cash flow. Smartsheet is simplifying its pricing model by collapsing creator and editor license types into a singular member license. Product innovation appears to be gaining traction with new user interfaces and Generative AI tools. These positive developments served to lift Smartsheet by 14%.”
4. United States Steel Corporation (NYSE:X)
Market Capitalization as of September 27: $8.03 billion
Number of Hedge Fund Holders: 58
United States Steel Corporation (NYSE:X) produces and sells steel products, including flat-rolled and tubular products for customers in industries across automotive, construction, consumer, electrical, industrial equipment, distribution, and energy. It is committed to providing high-quality steel products and solutions, while also focusing on environmental sustainability and corporate social responsibility.
The company is attracting attention due to the recent proposed acquisition by Nippon Steel for $15 billion. the deal is expected to face challenges and opposition in the US, and could potentially end up in cancellation.
As of the second quarter of 2024, the company made $4.12 billion in revenue, recording a year-over-year decline of 17.77%, primarily due to lower steel prices and reduced demand. Some of these challenges were offset by the strategic focus on efficiency and growth.
The company is expanding its Electric Arc Furnace (EAF) capabilities, with the Big River 2 (BR2) mini-mill set to nearly double its production capacity. This shift to more efficient and eco-friendly steelmaking at United States Steel Corporation (NYSE:X) is expected to increase EBITDA from $2.2 billion in 2023 to $2.8 billion by 2025. Investments in downstream products such as galvanizing and electrical steel will also likely boost future revenue.
The overall observation was that the Flat-Rolled Products revenue declined due to lower shipment volumes and pricing pressures. Tubular Products revenue remained stable, supported by ongoing demand from the energy sector.
Despite volatility and challenges, United States Steel Corporation (NYSE:X) is well-positioned for growth. The company’s strong fundamentals, strategic investments, and favorable market conditions make it a promising investment opportunity.
3. Elastic NV (NYSE:ESTC)
Market Capitalization as of September 27: $7.93 billion
Number of Hedge Fund Holders: 58
Elastic NV (NYSE:ESTC) is an American-Dutch search company that builds self-managed and SaaS offerings for search, logging, security, observability, and analytics use cases, helping organizations discover, analyze, and act on their data. Its flagship product, Elasticsearch, is a highly scalable and distributed search engine that can be used to index and search large volumes of data in real time.
Revenue grew 18.27% year-over-year in FQ1 2025, with cloud revenue growing by 30%. The company’s customer base is expanding, with over 1,370 customers spending ~$100,000. Elastic is also capitalizing on generative AI opportunities to drive growth in its Search business.
Of the 1,300+ customers using Elastic Cloud for GenAI, over 200 are larger customers. It has introduced a new incentive program called Elastic Express Migration to streamline the transition to the Elasticsearch AI platform. This program offers comprehensive migration services, helping companies avoid the costs of working with multiple vendors.
It’s also a prominent player in the 5G sector due to its powerful data analytics and search capabilities. Its Elastic Stack is a key product, enabling organizations to effectively manage and analyze the vast amounts of data generated by 5G networks. Elastic Security, another key offering, provides comprehensive security solutions, including SIEM, SOAR, and endpoint protection.
The recent reorganization of the sales team to focus on larger customers caused temporary delays in closing deals, especially in the Americas and EMEA. However, management expects most of these deals to close soon. Despite the challenges, the recent deals and partnerships demonstrate the company’s ability to adapt to customer needs and capitalize on the growing demand for AI-driven solutions, positioning it for success.
Artisan Global Discovery Fund stated the following regarding Elastic N.V. (NYSE:ESTC) in its Q2 2024 investor letter:
“During the quarter, we initiated new GardenSM positions in Liberty Formula One, Elastic N.V. (NYSE:ESTC) and Onto Innovation. Elastic is a software company that specializes in search and data analysis solutions. Elastic’s search, observability and security solutions are built on the Elastic Search AI Platform, which thousands of companies use, including more than 50% of the Fortune 500. Customers use the software to gain visibility into their data, reduce mean-time-to-resolution and drive actionable outcomes. We believe the company will benefit from the rise of generative artificial intelligence (AI). It provides a differentiated offering due to the combination of a unique pricing model based on consumption, products that handle numerous data types and volumes, and an open architecture environment that offers generative AI development flexibility.”
2. Roivant Sciences Ltd. (NASDAQ:ROIV)
Market Capitalization as of September 27: $8.51 billion
Number of Hedge Fund Holders: 62
Roivant Sciences Ltd. (NASDAQ:ROIV) is a healthcare company focused on applying technology to drug development and building subsidiary biotech and healthcare technology companies, utilizing a unique business model called “Vants” to accelerate drug development and commercialization. It partners with academic institutions and pharmaceutical companies to identify and develop promising drug candidates. The therapeutic areas of focus include oncology, immunology, neurology, and ophthalmology.
The company has 3 promising drug candidates under development through its Immunovant subsidiary. These drugs target autoimmune diseases, pulmonary hypertension, and psoriasis. Recently, it entered into a $1.2 billion deal for its Dermavant business in September, receiving $175 million upfront to support operations and research.
Potential catalysts for the company include successful clinical trials for its drugs, such as IMVT-1402, which may expand its treatment indications. Additionally, a patent win against Moderna and Pfizer could result in significant revenue. Revenue in FQ1 2025 was $55.13 million, up 154.96% from the year-ago period.
It recently received a $28 million milestone payment related to the Japanese approval of VTAMA. Additionally, it received its portion of $110 million from Roche for Telavant. In the first quarter of fiscal 2025, management had announced an upcoming Phase 2 program and mentioned progress with its IP litigation at Genevant regarding COVID-19 vaccine discovery.
Roivant Sciences Ltd.’s (NASDAQ:ROIV) success depends on its ability to commercialize drugs and maintain a robust pipeline. Recent deals and positive clinical data have positioned it for potential growth.
Greenlight Capital stated the following regarding Roivant Sciences Ltd. (NASDAQ:ROIV) in its first quarter 2024 investor letter:
“We established a small long position in Roivant Sciences Ltd. (NASDAQ:ROIV). ROIV is a biotech company focused primarily on inflammation and immunology therapies. In addition to an exciting pipeline, ROIV has a strong track record of positive trial results and successful monetization of pharmaceutical assets. The market currently believes core ROIV is effectively worthless, as the company has a market capitalization of about $9 billion, but holds over $6 billion of net cash and a $2.6 billion stake in its publicly traded subsidiary, Immunovant (IMVT). We believe there are several valuable assets inside the company, notably a broad patent estate around lipid nanoparticles used in COVID vaccines for which Moderna and Pfizer may owe ROIV several billion dollars in royalties, a potential multi-billion-dollar specialty autoimmune disease drug that recently passed its 7th successful Phase 2 trial and a novel topical agent to treat skin conditions such as psoriasis and atopic dermatitis. Additionally, we believe there are several other promising earlier stage assets inside ROIV. Lastly, the management team continues to find new opportunities to in-license from larger pharmaceutical companies. ROIV recently announced a $1.5 billion share repurchase program. We acquired our shares at an average price of $10.96. ROIV ended the quarter at $10.54.”
1. Cytokinetics Inc. (NASDAQ:CYTK)
Market Capitalization as of September 27: $6.21 billion
Number of Hedge Fund Holders: 64
Cytokinetics Inc. (NASDAQ:CYTK) is a biopharmaceutical company that develops muscle activators and muscle inhibitors as potential treatments for people with diseases characterized by impaired or declining muscle function. The lead drug candidate, mavacamten, is being investigated for the treatment of obstructive hypertrophic cardiomyopathy (HCM). It’s also exploring other therapeutic areas, like heart failure and neuromuscular diseases.
Earlier this year, the company entered into a $575 million funding collaboration with Royalty Pharma. The partnership supports the commercialization and development of Aficamten, a cardiac myosin inhibitor. This funding will help the company expand its cardiovascular pipeline and secure diversified capital.
The company ended up making $249,000, which was a decline of 71.28% year-over-year. The quarter closed with approximately $634.3 million in cash. The deal with Royalty Pharma could provide additional capital.
SEQUOIA-HCM is its most advanced Phase 3 trial for aficamten, but the company also has two other ongoing Phase 3 trials. These trials will provide additional evidence and expand the potential patient population. It’s also continuing its open-label extension study, FOREST-HCM, to collect long-term data.
MAPLE-HCM, a Phase 3 trial comparing aficamten to metoprolol, is expected to complete enrollment in Q3. This trial will address a key question for clinicians about treatment initiation. ACACIA-HCM, a Phase 3 trial for patients with non-obstructive HCM, is also ongoing. Additionally, it opened enrollment for CEDAR-HCM, a Phase 3 trial in pediatric patients with oHCM.
Carillon Eagle Small Cap Growth Fund stated the following regarding Cytokinetics, Incorporated (NASDAQ:CYTK) in its fourth quarter 2023 investor letter:
“Cytokinetics, Incorporated (NASDAQ:CYTK) is a clinical-stage biopharmaceutical company focusing on the discovery and development of therapeutic agents that modulate muscle function for the treatment of diseases and medical conditions. The company reported success in clinical trials for Aficamten, a treatment for symptomatic obstructive hypertrophic cardiomyopathy. Investors are optimistic about the prospects for this medication, which could turn out to be a safer, more effective alternative to the current market leader.”
While we acknowledge the growth potential of Cytokinetics Inc. (NASDAQ:CYTK), our conviction lies in the belief that AI stocks hold great promise for delivering high returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than CYTK but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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