In this article, we’re going to talk about the 8 most undervalued small-cap stocks to buy according to analysts.
Is a Multi-Year Small-Cap Cycle Ahead?
The landscape for small and mid-cap companies is becoming increasingly exciting in light of the Fed’s recent rate cuts, which could unlock significant investment opportunities. While the Russell 2000 index has lagged behind larger averages, analysts are optimistic about the growth potential of these stocks as market conditions improve.
Many small and mid-cap companies are well-positioned to capitalize on the favorable economic environment, with innovative strategies and strong fundamentals that can drive demand and market share. As interest rates stabilize and investor confidence grows, these companies are likely to attract renewed attention from investors seeking high-growth opportunities.
With the current environment ripe for exploration, there has never been a better time for investors to consider small and mid-cap stocks. Such was the sentiment of Curtis Nagel, senior US SMid cap internet analyst at BofA Securities, who spoke on this market scenario on CNBC earlier. We covered his opinion in another one of our articles, 7 Best Small Company Stocks To Invest In. Here’s an excerpt from it:
“…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… 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.”
In an interview on CNBC on September 30, Nancy Prial, Co-CEO & Senior Portfolio Manager at Essex Investment Management, expressed that she expects small-cap stocks to grow, driven by rate cuts and stock-picking opportunities.
Prial noted that small caps have been outperforming in the third quarter, largely driven by expectations of rate cuts, with a 50 basis point reduction being more significant than previously anticipated. She expressed optimism that small caps have substantial room to grow, emphasizing that this could mark the beginning of a multi-year cycle for these stocks. Currently, small-cap stocks are underrepresented in the market, comprising just under 5% of the total equity market, which is at record lows. This low ownership level presents an attractive opportunity for investors.
She pointed out that small-cap stocks remain significantly undervalued compared to their larger counterparts. Prial argued that for small caps to gain traction, several conditions must be met: the continuation of rate cuts, confidence in navigating a soft landing rather than a recession and expanding relative earnings growth. She noted that relative earnings growth for small caps is starting to improve and is expected to surpass that of large caps by the end of the year.
When asked about overall market estimates, Prial acknowledged that while the S&P 500 is projected to see earnings growth of 13% in the fourth quarter and 15% in 2025, she believes small caps could exceed these figures. Despite a slight slowdown in economic growth, she maintained that small-cap stocks could achieve earnings growth rates between 15% and 20% next year. She cautioned, however, that overall indices might not reflect this growth as estimates often start high before being revised downward.
Prial also discussed her investment picks related to infrastructure and near-shoring, specifically mentioning Clean Harbors. While acknowledging its strong performance in Q3, she clarified that they do not expect new legislation from Washington to drive further gains. Instead, she believes companies like this will benefit from existing bills that are now being implemented. Additionally, she highlighted Arcosa as a “picks and shovels” play within the sector, emphasizing its role in supporting the build-out of artificial intelligence infrastructure and digitalization efforts across various industries.
Her insights reflect a bullish outlook on small-cap stocks amid changing economic conditions and anticipated monetary policy shifts. By focusing on strategic stock selection and recognizing the potential for earnings growth within this sector, investors may find compelling opportunities as they navigate the evolving market landscape. In that context, we’re here with a list of the 8 most undervalued small-cap stocks to buy according to analysts.
Methodology
We used stock screeners to look for companies trading between $1 billion and $10 billion, that’s our definition of small-cap stocks. We then found 25 stocks with a forward price-to-earnings ratio under 15, and an upside potential of over 20%. We then selected the 8 stocks that were the most popular among elite hedge funds and that analysts were bullish on. The stocks are ranked in ascending order of their analysts’ upside potential.
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).
8 Most Undervalued Small-Cap Stocks To Buy According To Analysts
8. Skechers USA Inc. (NYSE:SKX)
Forward Price-to-Earnings Ratio: 12.71
Average Upside Potential: 24.37%
Number of Hedge Fund Holders: 45
Skechers USA Inc. (NYSE:SKX) is a multinational footwear and apparel company that is known for its comfortable and stylish shoes, which are popular among people of all ages. It offers a variety of styles, including sneakers, sandals, boots, and slip-on shoes. The products are sold online as well as in retail stores around the world.
With nearly 5300 stores worldwide, this company grew its revenue by 7.21% year-over-year in the second quarter of 2024. Despite facing headwinds such as currency volatility, supply chain challenges in Europe, regulatory hurdles in India, and weak consumer sentiment in China (despite 3% Chinese revenue growth), the company surpassed sales expectations. Domestic sales increased by 7.7%, while international sales (~60% of the total sales) increased by 6.9%, representing around 60% of the total sales.
It invested $47.9 million in Q2 to expand its retail footprint and enhance its online sales capabilities. The company opened a total of 317 new stores worldwide, including 25 in the US, 98 in other countries, and 194 through distributors, licensees, and franchise agreements.
On September 17, Skechers USA Inc. (NYSE:SKX) and My Gym joined forces to create a special event for families: Skechers Kids Month. This month-long celebration is taking place at My Gym locations across North America, offering a variety of fun activities and giveaways for parents and kids.
Skechers USA Inc. (NYSE:SKX) has demonstrated remarkable resilience and strategic agility, overcoming significant industry challenges to deliver strong growth. The company’s innovative product lineup, coupled with its global brand recognition and operational efficiency, positions it as a leading player in the footwear market.
Meridian Growth Fund made the following comment about Skechers U.S.A., Inc. (NYSE:SKX) in its Q4 2022 investor letter:
“Skechers U.S.A., Inc. (NYSE:SKX), designs and sells lifestyle and athletic footwear. It is the third-largest footwear company in the U.S. and has a strong and growing international presence. In our view, the market does not fully recognize the growth opportunity represented by Skechers’ international business. During the quarter, the company reported strong gains worldwide, led by a 48% increase in sales in the EMEA region and a 9% rise in the APAC region despite COVID-related slowdowns, as well as 16% growth in the Americas, powered by healthy demand in the U.S. and Canada. The company is still contending with some expense issues, primarily related to ongoing supply chain and distribution channel challenges, but investors are increasingly recognizing management’s success at managing through the issues and setting the company up for potentially strong cash flow growth in 2023. Amid the growing optimism, we maintained our position in the stock.”
7. Scorpio Tankers Inc. (NYSE:STNG)
Forward Price-to-Earnings Ratio: 5.59
Average Upside Potential: 27.84%
Number of Hedge Fund Holders: 42
Scorpio Tankers Inc. (NYSE:STNG) is an international provider of the transportation of refined petroleum products. It owns and operates a fleet of tanker ships that transport products like gasoline, diesel fuel, and jet fuel. So, it plays a crucial role in the global energy supply chain, ensuring that refined petroleum products are delivered to markets around the world.
The product tanker market is experiencing remarkable strength, driven by rising global demand and shifts in refining capacity that have boosted seaborne exports. Rates have remained high for the past 2.5 years, with average MR tanker earnings reaching record levels since 1990. Seaborne exports reached a record high in June, with ton-mile demand up 14%.
The company made $373.47 million in Q2 2024 revenue, recording a year-over-year growth of 14.02%. The earnings per share in this quarter was $3.60. Year-over-year increases are notable, with LR2s and MRs both commanding $34,000 per day as Q3 begins. Strong demand is expected to continue, with an anticipated increase of nearly 1 million barrels per day in the second half of the year.
On September 3, it announced the sale of two MR product tankers, STI San Antonio and STI Texas City, for $42.5 million each. These 2014-built tankers are equipped with exhaust gas cleaning systems and are expected to be sold by the end of the year. The company has also entered into a 3-year time charter agreement for another ship at a daily rate of $29,550, starting in late 2024.
The company’s commitment to shareholder value is evident in its active share buyback program. Its consistent repurchases of its own shares demonstrate its confidence in its future prospects and its dedication to returning value to investors, making Scorpio Tankers Inc. (NYSE:STNG) an attractive investment option.
6. Webster Financial Corporation (NYSE:WBS)
Forward Price-to-Earnings Ratio: 7.78
Average Upside Potential: 28.15%
Number of Hedge Fund Holders: 42
Webster Financial Corporation (NYSE:WBS) is an American commercial bank that has 177 branches and 316 ATMs. It offers a range of financial products and services, including commercial banking, retail banking, wealth management, and investment banking, and is focused on providing personalized service and tailored solutions to its customers, both individuals and businesses.
Management reported a year-over-year decline of 8.71% in revenue for Q2 2024, amounting to $614.60 million. Despite the decline, a major announcement this quarter was a new joint venture with Marathon Asset Management. The joint venture will enhance the company’s balance sheet flexibility, expand its offerings, and allow it to better serve its clients. The company plans to launch the joint venture in Q4 2024 or Q1 2025.
The company is making several improvements to remain competitive and grow its business, including investing in technology, expanding its product offerings and improving its efficiency. These initiatives are expected to help the company enhance its digital experience, offer new products and services to its customers, reduce costs, and increase profitability.
Webster Financial Corporation (NYSE:WBS) demonstrates a strong financial foundation and a diversified business model. Its balanced loan portfolio and strategic management of its deposit base position it for continued growth and profitability, making it a rather attractive investment opportunity.
Diamond Hill Select Strategy stated the following regarding Webster Financial Corporation (NYSE:WBS) in its first quarter 2024 investor letter:
“Among our bottom Q1 contributors were Humana, Extra Space Storage and Webster Financial Corporation (NYSE:WBS). Self-storage real estate investment trust (REIT) Extra Space Storage and HSA-focused bank Webster Financial performed well at the end of 2023 as investors anticipated interest rate cuts and easier financial conditions in 2024. As this sentiment largely reversed in early 2024 against a resilient economic backdrop and still-elevated interest rates, real estate (and REITs broadly) and banks were pressured in Q1 (though it’s worth noting Webster Financial shares were modestly positive in the quarter). However, we believe Extra Space Storage has a high-quality, long-term franchise with an industry-leading operating platform that should position it well in the future. Similarly, we believe Webster Financial’s large HSA account platform and diverse deposit base is a strong competitive advantage in the current macroeconomic environment.”
5. Bath & Body Works Inc. (NYSE:BBWI)
Forward Price-to-Earnings Ratio: 7.99
Average Upside Potential: 38.65%
Number of Hedge Fund Holders: 55
Bath & Body Works Inc. (NYSE:BBWI) is an American specialty retail company that specializes in selling personal care products, including soaps, body lotions, fragrances, and candles, known for its wide variety of scents and seasonal collections. It has a strong presence in shopping malls and often offers promotions and discounts to attract customers.
The company is actively pursuing growth strategies. It’s focusing on strengthening its core portfolio, exploring new market opportunities, adapting to changing market dynamics, improving profitability, and reducing costs. Despite such strides, there was a 2.12% decline in FQ2 2025 revenue, as compared to the year-ago period. Performance was impacted by the semiannual sales mostly, which fell short of expectations. Without this impact, revenue would’ve only been down 1%. Its loyalty program has 37 million+ active members accounting for 80% of US sales.
It’s focusing on growth in adjacent categories like men’s, hair, lip, and laundry, targeting both existing and new customers. The company is launching new products and campaigns in the second half of the year to increase awareness. Its real estate portfolio is strong, with ~55% of North American stores now in off-mall locations. International system-wide retail sales grew double digits in the second quarter in unaffected areas.
Bath & Body Works Inc. (NYSE:BBWI) is enhancing its mobile app with new features like app for all, frictionless ordering, and geotargeting, and is launching a TikTok shop to attract younger customers and introducing a GenAI fragrance finder, Gingham Genius, to provide a personalized fragrance-finding experience.
The company is focused on growth, investing in customer engagement, expansion, operational efficiency, product innovation, and omnichannel experiences. It’s making progress in these areas, leveraging its competitive advantages, such as a diverse product range and strong brand loyalty. These factors together position Bath & Body Works Inc. (NYSE:BBWI) for long-term success.
Third Point made the following comment about Bath & Body Works, Inc. (NYSE:BBWI) in its Q4 2022 investor letter:
“We initiated a position in Bath & Body Works, Inc. (NYSE:BBWI) earlier in the year that we added to significantly in the Fourth Quarter. The company, which sells personal care and home fragrance products, separated from Victoria’s Secret in late 2021 and has struggled to find its footing in the public markets. Bath & Body Works was challenged by the normalization of trends following the pandemic, but also suffered from execution hiccups that made matters worse. On the operations front, the company spent much of 2022 without a permanent CEO, cut guidance multiple times given inventory and cost pressures, and did a poor job communicating meaningful increases in the company’s cost structure as a standalone business. On the capital allocation front, the execution of an accelerated share repurchase program was sloppy at best.
Despite these recent struggles, we believe BBWI can change its equity story, improve its earnings power, and earn a more premium valuation. The recent appointment of a new CEO, Gina Boswell from Unilever, is an encouraging first step…” (Click here to read the full text)
4. Matador Resources Co. (NYSE:MTDR)
Forward Price-to-Earnings Ratio: 5.41
Average Upside Potential: 43.18%
Number of Hedge Fund Holders: 37
Matador Resources Co. (NYSE:MTDR) is an independent oil and gas exploration and production company operating primarily in the US. It focuses on developing unconventional oil and gas resources, particularly in the Permian Basin. It’s known for its efficient operations, low-cost production, and strong focus on maximizing shareholder value.
The company made $847.14 million in revenue for the second quarter of 2024, up 32.76% from a year-ago period. The earnings per share were $2.05. Both of these values beat analyst expectations for the quarter. It has a strong financial foundation, evidenced by its high Return on Equity of 21%, which is significantly higher than the industry average of 16%. This has contributed to impressive earnings growth of 44% in the last 5 years.
The company reinvests a substantial portion of its profits back into the business, indicating a commitment to growth. While analysts predict slower earnings growth in the future, its strong financials suggest that the market might be undervaluing the company.
The company recently completed its $1.832 billion acquisition of a subsidiary of Ameredev II Parent, LLC on September 19. This strategic move expands Matador Resources Co.’s (NYSE:MTDR) footprint in the Delaware Basin, a key US oil and gas region. The acquired assets include ~33,500 contiguous net acres in the Delaware Basin, with significant production potential. It plans to leverage operational efficiencies to generate synergies and increase production. The acquisition also adds 118 million barrels of oil equivalent in proved reserves.
Given its robust financials, operational efficiency, and commitment to shareholder value, the company is a promising investment option.
TimesSquare Capital U.S. Small Cap Growth Strategy stated the following regarding Matador Resources Company (NYSE:MTDR) in its first quarter 2024 investor letter:
“We often see the ebb and flow of the Energy sector tied to underlying commodity prices. In this area, we seek low-cost exploration & production companies with high-yielding acreage or specialized service providers. Matador Resources Company (NYSE:MTDR) is an exploration and production company with operations in the Delaware Basin of Southeast New Mexico and West Texas. Its shares were boosted 18% by a solid fourth quarter with higher-than-expected production volume and lower operating expenses.”
3. Seadrill Ltd. (NYSE:SDRL)
Forward Price-to-Earnings Ratio: 9.98
Average Upside Potential: 47.57%
Number of Hedge Fund Holders: 41
Seadrill Ltd. (NYSE:SDRL) is a global offshore drilling contractor that provides drilling services to the oil and gas industry. It owns and operates a fleet of drilling rigs, including semi-submersibles and drillships, which are used to explore and develop oil and gas fields in deepwater and harsh environments.
It has also been returning value to shareholders through buybacks as part of a $200 million program. Despite industry challenges, Seadrill Ltd. (NYSE:SDRL) has a potential FCF of $900 million, representing one-third of its enterprise value. Day rates have rebounded from lows, and it has restructured its debt and refined its fleet strategy.
The company’s recent acquisition of Aquadrill and successful jack-up sales have strengthened its position. Despite such moves, revenue fell 9.42% in the second quarter of 2024. While the company is not under financial pressure, it is strategically managing its fleet by reactivating idle rigs only when profitable contracts are secured.
On September 12, the company’s CEO expressed interest in acquiring “distressed assets” or companies with “distressed balance sheets.” It’s also interested in adding to its fleet of drilling rigs through acquisitions or partnerships. In a recent transaction, it completed the sale of 3 jack-up rigs to Gulf Drilling International for $338 million.
Later on September 17, Seadrill Ltd. (NYSE:SDRL) and Oil States formed a strategic partnership to enhance offshore Managed Pressure Drilling (MPD) operations. Oil States’ MPD Integrated Riser Joint (IRJ) system will be used on Seadrill Ltd.’s (NYSE:SDRL) West Polaris rig.
It’s a well-positioned offshore drilling contractor with a strong balance sheet and a focus on value creation. It has demonstrated resilience and a strategic approach to its business, making it a top stock to buy.
Patient Capital Management stated the following regarding Seadrill Limited (NYSE:SDRL) in its fourth quarter 2023 investor letter:
“We purchased a new energy name in the quarter, buying shares in Seadrill Limited (NYSE:SDRL). Seadrill is the fourth largest pure play deepwater drilling specialist. The company emerged from bankruptcy in February 2022 with a net cash position. The company is set to benefit from limited supply and increasing demand in the deepwater drilling rig market. Nearly half of all deepwater drilling rigs in the world were scrapped during the last decade. In addition, player consolidation puts the industry in a more rational position than we have seen historically. As land-based oil production growth comes under pressure, offshore production is receiving renewed interest. With a highly specialized rig base, the company is benefiting from increasing prices which are leading to strong FCF yields given the limited need for capital expenditures (CAPEX). The company has committed to returning 50% of FCF to shareholders via dividends and buybacks. Since September 2023, the company has repurchased 8% of shares outstanding. As old contracts roll-over and new contracts are signed at the higher day rates, operating profit and FCF are expected to expand dramatically. Seadrill could either consolidate the space or be acquired.”
2. Civitas Resources Inc. (NYSE:CIVI)
Forward Price-to-Earnings Ratio: 4.14
Average Upside Potential: 56.42%
Number of Hedge Fund Holders: 52
Civitas Resources Inc. (NYSE:CIVI) is an independent oil and gas exploration and production company focused on the Permian Basin in the US, specializing in developing unconventional oil and gas resources, primarily targeting the Wolfcamp and Bone Spring formations. It aims to maximize value for shareholders through efficient operations, low-cost production, and disciplined capital allocation.
Revenue grew strongly by 98.73% year-over-year in Q2 2024, generating $1.31 billion, where Crude oil accounted for 87% of total revenue. Total volumes were above plan as the Permian production was up about 12%. Around 58% of second-quarter sales volumes in the Permian Basin were from the Midland Basin, with 42% from the Delaware Basin.
Oil was up 5%, driven by strong well performance and continued cycle time acceleration. In late June 2024, production began on 13 four-mile laterals in the Watkins area of the DJ Basin, marking the longest laterals ever drilled and completed in Colorado.
The Permian Basin saw a significant increase in sales volumes, up nearly 12% from the first quarter. This growth was fueled by strong production from recent wells in the Delaware and Midland Basins. Additionally, well costs in the Midland Basin have decreased by 10% since the beginning of the year, leading to an improvement in well-level average rates of return by more than 10% at a WTI price of $70 per barrel.
It made significant progress in sustainability in 2023, reducing emissions by 41%, plugging 19 orphan wells, and maintaining a strong safety record. The company remains committed to carbon neutrality and has updated its targets to include its recent Permian Basin acquisitions. Investors seeking exposure to the oil and gas industry may find Civitas Resources Inc. (NYSE:CIVI) to be a compelling investment option.
Diamond Hill Mid Cap Strategy stated the following regarding Civitas Resources, Inc. (NYSE:CIVI) in its Q2 2024 investor letter:
“Despite rising valuations, we continue finding attractively valued, quality companies the market is overlooking amid its increasingly narrow focus on the mega-cap technology stocks dominating the major indices. In Q2, we introduced new positions in Sysco Corporation, Civitas Resources, Inc. (NYSE:CIVI), Labcorp Holdings and VeriSign.
Civitas Resources is an oil and natural gas explorer and producer focused primarily on the DJ Basin. It has recently made several acquisitions in the Permian Basin as it attempts to expand and diversify its holdings beyond the DJ Basin — a decision that we appreciate. It has low-cost drilling inventory, and we believe the management team responsibly runs the company. We added it to the portfolio in Q2, as we think its assets and cash-generation potential remain undervalued by the market.”
1. Valaris Ltd. (NYSE:VAL)
Forward Price-to-Earnings Ratio: 5.41
Average Upside Potential: 60.97%
Number of Hedge Fund Holders: 39
Valaris Ltd. (NYSE:VAL) is the largest offshore drilling and well drilling company in the world, and owns 52 rigs, including 36 offshore jack-up rigs, 11 drillships, and 5 semi-submersible platform drilling rigs. It owns and operates a fleet of drilling rigs, including semi-submersibles and drillships, which are used to explore and develop oil and gas fields in deepwater and harsh environments.
The broader energy sector has faced challenges due to global economic concerns and rising interest rates. Slowing economic growth has led to decreased oil demand. This, combined with lower oil prices, has negatively impacted Valaris Ltd. (NYSE:VAL), as it relies on drilling rig demand from oil producers. Reduced spending on exploration and drilling activities has made it difficult for the company to achieve higher revenue and earnings growth.
Yet, the company continues to record booming business, securing a $500 million contract backlog with Equinor offshore Brazil for Valaris DS-17. In the second quarter of 2024, it made $610.10 million in revenue, up 46.94% year-over-year. This growth was driven by a 99% revenue efficiency rate during the quarter, reflecting effective contract management and optimal utilization of its fleet. The company’s backlog also increased for the 7th consecutive quarter, reaching over $4.3 billion.
The company has achieved several safety milestones, including 2 years without a recordable incident for the Valaris 249 team and 1 year without a recordable incident for the Valaris DS-10 and 106 teams. It has also successfully reactivated the Valaris DS-7 drillship for a long-term contract, demonstrating its ability to efficiently reactivate rigs and secure profitable contracts. It still has additional high-specification drillships that can be reactivated to meet increasing customer demand.
It’s a promising investment opportunity in the offshore drilling industry. The company’s strong financial position, growing backlog, and focus on reactivating high-specification rigs position it for continued growth and profitability. With stable oil prices and positive industry trends, Valaris Ltd. (NYSE:VAL) is well-equipped to capitalize on emerging opportunities and deliver value to shareholders.
Praetorian Capital stated the following regarding Valaris Limited (NYSE:VAL) in its Q2 2024 investor letter:
“Valaris Limited (NYSE:VAL) has been rangebound for over two years now, awaiting the signing of new contracts at current market rates, that will replace expiring contracts that are frequently less than half of current prevailing rates. There have been some questions as to why the company has been slow to sign new contracts. However, I believe that management is trying to trade a slightly reduced price for increased duration of contract tenure, and that’s the reason for a lack of commentary on new contracts. Should the company announce new contracts at anywhere near current market rates, I believe that the shares will respond in a rather dramatic way—especially as Valaris is by far the cheapest of the large drilling companies (based on the enterprise value per rig metric), despite having one of the best fleets and strongest balance sheets. Between our common and warrant position, Valaris was our 2nd largest position at the end of June.”
While we acknowledge the growth potential of Valaris Ltd. (NYSE:VAL), 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 VAL but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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