We recently compiled a list of the 8 Most Profitable Small-Cap Stocks To Invest In. In this article, we are going to take a look at where Central Garden & Pet Company (NASDAQ:CENT) stands against the other profitable small-cap stocks.
Fed’s rate cuts have been all the rage recently, and they may have set the stage for a strong Q4. On September 27, Jay Woods, chief global strategist at Freedom Capital Markets and long-term member of the New York Stock Exchange, filled in for Michael Reinking on Market Storylines inside the Icehouse Podcast feed to discuss the Fed rate cuts and outlook for Q4 2024. He said the market has absorbed rate cuts very positively, with the S&P 500 reaching new all-time highs.
He also said that historically, the fourth quarter tends to perform well when markets hit new highs in September. This holds especially true in election years. With the stock market now in Q4, Woods highlighted that certain sectors, like utilities, real estate, and industrials, led the market in Q3. Technology, however, lagged in Q3 and might make a comeback in Q4.
Small-Cap Stocks Set for Major Gains
We recently discussed the potential future outlook of small-cap stocks in an article on 8 Penny Stocks with Biggest Upside Potential According to Analysts. Here is an excerpt from the article:
On October 4, Eduardo Lecubarri, managing director and global head of small and mid-cap equity strategy at J.P. Morgan, talked about the potential of investing in small to mid-cap stocks in an interview on CNBC. He breaks down the opportunities in the space, while shedding light on how to pick the right stocks in what he calls a “generational opportunity.” He says that we are living in a tricky world where the opportunity to invest lies in realizing the hidden value in the small and mid-cap sectors and picking the right stocks instead of investing broadly.
He claims that times have changed, with small and mid-caps stocks going from being not the most suitable investment in previous years to paving the way for the biggest opportunity in the sector in the past 2-3 decades. He further elaborated and said that the opportunity of picking a small to mid-cap versus large-cap stock is bigger now than he has ever seen in the past 30 years. This generational opportunity, however, is not without its pitfalls for those who fail to make the right picks.
Pricing power and high-margin businesses can be suitable indicators of the right small to mid-cap stocks to invest in, according to Lecubarri. The need to find value and invest in stocks with achievable earnings growth expectations also holds pivotal value in making the right choices. While 2022 to 2023 was the time to stay away from small to mid-cap stocks, Eduardo Lecubarri says that times have changed with the stabilizing economy.
Analysts are thus bullish on the potential of small caps, with the general expectation that they might outperform large caps in a slowing economy. However, with the US Presidential elections just around the corner, the market environment is posing some choppiness, which demands caution from investors.
Why Are Analysts Keeping an Eye on Small Caps?
On October 4, Larry Adam, chief investment officer at Raymond James, joins CNBC’s ‘The Exchange’ to discuss why he’s keeping an eye on small caps in certain sectors. He said that lower interest rates are expected to benefit small caps, especially the Russell 2000, thus promoting the perspective that the bull market will continue. With the risk of recession now overruled, the economy is moving closer to soft landing. Adam concludes that with the Fed continuing to lower interest rates, small cap stocks will be better positioned to meet their financial needs.
These stocks get around 56% of their financing from the short end of the yield curve, which refers to the short-term interest rate on the yield curve. This typically represents the yields on bonds with shorter maturities, such as 2-year or 5-year Treasury notes. Large-cap companies, in contrast, get only 26% of their financing from these short ends of the curve. Small-caps are thus in a better position to benefit.
The Fed is anticipated to cut rates two times in 2024 and another four times in 2025, reflecting a positive market for small-caps. These stocks have also outperformed large caps. When taken in a historical context, circumstances help small caps significantly more than the rest of the market whenever the economy goes towards a soft landing.
Small Caps and a Late Cycle Economy
On October 11, CNBC’s Mike Santoli and Northwestern Mutuals’ Brent Schutte, appeared on ‘Power Lunch.’ He said that there is a delicate balancing act that the Fed has to navigate, and historically, haven’t done a good job doing so. They tend to wait till the labor market shows signs of weakening, and unfortunately, it tends to trend and then its too late. He says that this time is a little different because there is inflation and the embers are burning, and this is a late cycle economy.
With the late cycle phase of the economy, concerns about the shift from large cap stocks to small caps is rising. Schutte says that such concerns were also heard in 1999 and 2000, years that had a similar market. The market became very narrow because the economy became very narrow.
He says that one way or the other, for investors more interested in returns over a three to five year period, small and mid caps stocks, irrespective of whether a soft landing appears or not, offer value because they have been priced, somewhat, for a recession.
Our Methodology
For this article, we used Finviz and Yahoo Finance stock screeners plus online rankings to compile an initial list of the 60 largest small-caps. We define small-cap stock to be those with market caps between $300 million and around $2 billion. Please note that the market caps were recorded on 17th October, 2024. From that list, we narrowed our choices to 8 stocks with positive TTM net income and 5-year net income growth informed by reputable sources, including SeekingAlpha and Yahoo Finance. We then sorted the stocks in ascending order of their hedge fund sentiment, which was taken from our 912 elite hedge funds database as of Q2 of 2024.
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).
A farmer carrying a bag of fertilized over his shoulder signifying the fertilizers the company produces.
Central Garden & Pet Company (NASDAQ:CENT)
Market Cap: $2.1 billion
5-year Net Income Growth: 7.52%
TTM Net Income: $144.98 million
Number of Hedge Fund Holders as of Q2 2024: 20
Central Garden & Pet Company (NASDAQ:CENT) engages in the garden and pet industries in the US, with its operations divided into two segments: Pet and Garden. Despite a challenging environment, the company delivered solid Q3 2024 earnings. It experienced double digital e-commerce growth across its garden and pet categories, and even expanded its gross margin.
Central Garden & Pet Company’s (NASDAQ:CENT) strategy to enhance efficiency and simplify its business across its organization is bearing fruit. It is maintaining its outlook for the fiscal year, and is positioned to benefit from the long-term positive consumer trends in the pet and garden industries. Its cost and simplicity program is increasingly equipping the company to improve its profitability and make productive investment in its Central to Home strategy.
Its Pet segment sales grew by 1% to $508 million. This was driven by the recent TDBBS acquisition, its professional business, dog and cat and equine. In addition, its POS outperformed shipments. Branded pet products outperformed the company’s private label products, highlighting the strength of its brands.
It also expanded its market share in flea-and-tick aquatics, small animals, and wild birds. The company expects consumable pet products to continue growing, with household penetration and buy rates to remain fairly stable. It also anticipates consumer trends, pet health and wellness, a growing share of e-commerce, and a shift to younger generations to support the long-term growth of the pet industry. Central Garden & Pet Company (NASDAQ:CENT) ranks sixth on our list of the 8 most profitable small-cap stocks to invest in.
Overall CENT ranks 6th on our list of the most profitable small-cap stocks to invest in. While we acknowledge the potential of CENT as an investment, 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 an AI stock that is more promising than CENT but trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.