In this article, we will look at the 8 Best Small-Cap Growth Stocks to Buy According to Analysts.
How Did The Small Cap Stocks Perform During the Third Quarter of 2024?
During the third quarter of 2024, small-cap stocks represented by the Russell 2000 Index made a strong comeback after a somewhat disappointing second quarter. The Russell 2000 Index improved by 9.3%, surpassing the 6.1% growth of the large-cap Russell 1000 index and the 4.2% growth of the mega-cap Russell Top 50 index.
This rebound indicates that smaller companies are performing well relative to their larger counterparts. Additionally, other indexes within the Russell Index also showed positive results, for instance, the Russell Microcap Index went up by 8.3%, and the Russell Midcap Index increased by 9.2%. The graph for the third quarter represented a caret shape suggesting consistent upward movement across various market segments.
Read Also: 7 Best Nano Cap Stocks To Invest In and 10 High Growth Non-Tech Stocks That Are Profitable in 2024.
Francis Gannon, Co-Chief Investment Officer, and Managing Director of Royce Investment Partners shared his insights on small-cap stocks in an article published on October 1. He pointed out that the quarter was filled with great news for the market with the 50 basis point cut along with an indication of at least one more cut before year-end being the biggest news from an investment point of view. He further mentioned that inflation and unemployment data were also favorable with GDP inching upwards. However, regardless of the potential in the market, small-cap stocks are faced with a long road ahead as large-cap stocks held a market-leading position for almost the first nine months of the year.
Gannon thinks various factors could potentially support small-cap stocks to gain and sustain market leading position. While discussing the performance of various sectors within the small-cap (Russell 2000 Index), he mentioned that during the third quarter, undervalued value stocks performed well, with the Russell 2000 Value Index rising by 10.2%. This strong performance in value stocks was largely driven by the Financials sector, particularly banks, which make up a significant portion of the index. Gannon mentioned that many sectors other than Financials contributed to the growth, with Energy being the only one that did not perform well.
Moreover, while talking about how growth and value stocks have performed during the first 9 months of the year, Gannon pointed out value stocks still lag behind growth stocks, with the Russell 2000 Value Index up 9.2% compared to 13.2% for growth stocks. However, the gap between the two narrowed by the end of September, and Gannon believes that a growing economy will continue to support value stocks in the upcoming months.
The Bull Case For Small Cap Stocks
Francis Gannon also presented his bullish sentiment for small-cap stocks by analyzing historic trends. He believes that with the United States economy still growing and interest rates becoming more normal could be beneficial for small-cap companies. Gannon bases his bullish thesis on three historical pieces of evidence. He mentioned that it is not common for the Russell 2000 to have a monthly return of over 10%. This has only happened 22 times since the index started in 1978. However, when returns have been above 10%, small-cap stocks tend to perform very well in the following months. Secondly, historically speaking when the Fed lowered interest rates small-cap stocks tended to outperform large-cap stocks in the months following the rate cut. Gannon pointed out that this trend has been observed since at least 1957.
Thirdly, small-cap stocks have underperformed for a while, however, after periods of low returns, particularly when annual returns go lower than 3% small-cap stocks usually bounce back with better-than-average returns.
In addition to Francis Gannon’s analysis regarding small-cap stocks, we have also covered Brent Schutte’s analysis in 8 High Growth Penny Stocks That Are Profitable in 2024. Brent Schutte is the Chief Investment Officer of Northwestern Mutual Wealth Management Company. Here is a piece from the article:
“Brent Schutte, Chief Investment Officer of Northwestern Mutual Wealth Management Company joined CNBC to discuss how small caps offer more value. Schutte mentioned the 1999 and 2000 markets which were very similar to the current market. During that time the market became very narrow, he thinks that the current market is barely holding up. To explain his point he mentioned the manufacturing market and the lower and middle income consumers have been harmed by the interest rate hike over the past years. Schutte does not see the Fed being able to alleviate the suffering market and what consumers have been through and believes that how the economy will perform in the future remains an unanswered question.
For investors who are more interested in returns over a 3 to 5-year period, small-cap stocks regardless of a soft landing or not, offer value as these stocks are priced for recessions. On days when interest rates rise, large-cap stocks, particularly those in the S&P 500, tend to perform better while small-cap stocks often decline. However, Schutte argued that there is a debate about how much of the current economic situation is already reflected in stock prices. He thinks optimism is a contrarian indicator, meaning when many believe stocks will rise, it could signal a downturn. He suggests that as investors the strategy of investment should be towards undervalued stocks where optimism is low, suggesting that this approach may yield better returns as conditions change and currently small caps are undervalued indicating better returns.”
With that, let’s take a look at 8 best small-cap growth stocks to buy according to analysts.
A business person consulting with their financial advisor showing their portfolio of stocks.
Our Methodology
To compile the list of 8 best small-cap growth stocks to buy according to analysts we used the Finviz stock screener and CNN. Using the screener we shortlisted growth stocks with a market capitalization between $500 million and $2 billion. Once we had the list of small cap growth stocks we then checked the analyst upside potential for each stock sourced from CNN and ranked them in ascending order of the upside potential. Please note that the data was recorded on October 19, 2024. Moreover, we have also mentioned the number of hedge funds holding each stock sourced from Insider Monkey’s Q2 2024 database.
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).
8 Best Small-Cap Growth Stocks to Buy According to Analysts
8. Rogers Corporation (NYSE:ROG)
Market Capitalization: $1.97 Billion
Number of Hedge Fund Holders: 21
Analyst Upside Potential: 38.28%
Rogers Corporation (NYSE:ROG) is the eighth-best small-cap growth stock to buy according to analysts. It was not only held by 21 hedge funds in Q2 2024 as per Insider Monkey’s database but analysts are also expecting its price to go up by around 38% during the year.
It creates specialized materials and components for various high-tech industries, including EV/HEV, ADAS, Wireless infrastructure, and other technology-related industries. The company mainly focuses on Advanced Electronics Solutions (AES), which makes materials for electronic devices used in Electric and Hybrid Vehicles (EV/HEV), aerospace, and renewable energy technology.
The company’s second quarter of fiscal 2024 was solid financially. Its net sales reached $214 million, slightly increasing from the previous quarter. Moreover, margins improved to 34.1% from 32% during Q1 of fiscal 2024, driven by better cost management and a flexible product mix.
Rogers Corporation (NYSE:ROG) experienced strong growth in its Portable Electronics and Wireless infrastructure products. However, it faced challenges due to high inventory levels of ceramic products, mainly in the EV/HEV and industrial markets. Management promptly reduced its manufacturing cost due to decreasing orders in these industries, making it possible for the company to maintain its gross margins.
The company is also consolidating its high-frequency circuit material manufacturing operations, expected to be completed by mid-2025. This move aims to enhance factory utilization and reduce expenses, projecting savings between $7 million to $9 million.
Moving forward, Rogers Corporation’s (NYSE:ROG) management anticipates growth in the EV battery sector in China. It plans to support local production in China by opening a new facility, which is expected to begin production next year.
7. Recursion Pharmaceuticals, Inc. (NASDAQ:RXRX)
Market Capitalization: $1.91 Billion
Number of Hedge Fund Holders: 24
Analyst Upside Potential: 47.06%
Recursion Pharmaceuticals, Inc. (NASDAQ:RXRX) is a clinical-stage biotechnology company focusing on transforming drug discovery through advanced technology.
They aim to decode biological processes to create more effective drugs faster than the traditional methods. One of their key tools is the Recursion Operation System, which combines various technologies to analyze vast amounts of biological and chemical data.
The company is poised for growth due to its significant pipeline and strategic partnerships. During the second quarter of fiscal 2024 earnings release management revealed that it has nearly 10 clinical readouts planned for the next 18 months, which marks a significant step in proving its innovative approach to drug discovery.
Moreover, Recursion Pharmaceuticals, Inc. (NASDAQ:RXRX) has formed strategic partnerships with key players including Roche, Genentech, and Bayer, which enhanced their capabilities in exploring new drug targets, particularly in areas like oncology and neuroscience. The company with its partnership with Exscientia aims to build a tech-driven platform that will enable patient-centric target discovery, and structure-based drug design and will implement 2D and 3D AI tools to innovate drug designs.
Financially speaking, the company has a robust cash position with $474.3 million in cash and cash equivalents as of June 30, 2024. It also generated $14.2 million in revenue for the second quarter which was up from $11 million during the first quarter.
It is one of the best small-cap growth stocks to buy according to analysts with a market capitalization of $1.91 billion. Analysts’ median price target is pointing towards a 47% upside from the current levels.