We recently published a list of 10 Best Small-Cap Growth Stocks to Buy Now. In this article, we are going to take a look at where Red Cat Holdings, Inc. (NASDAQ:RCAT) stands against other best small-cap growth stocks to buy now.

Are Small-Cap Stocks Poised for Growth?

On November 4, 2024, Nick Sheridan, Portfolio Manager at Janus Henderson released a report on small-cap stocks exploring how these stocks offer unique growth and diversification opportunities. Sheridan highlighted that maintaining visibility amidst the dominance of mega-cap tech stocks has been a challenge for small-cap stocks. Historically, small caps have been overshadowed by larger companies, which have captured investor attention with themes like artificial intelligence and have seen ever-higher multiples as a result. However, Sheridan notes that this is not a new phenomenon. Small caps have consistently delivered higher earnings growth than large caps over time, therefore, making them an attractive option for investors seeking growth and diversification.

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In recent years, mega-cap tech stocks have been the driving force behind the stock market, but cracks have begun to appear in their performance, leading investors to seek value elsewhere. On the other hand, as interest rates are expected to decrease, small caps are poised to benefit, as they historically perform well in such environments. Sheridan highlighted that the key to small-cap outperformance lies in their ability to grow earnings more rapidly than large-caps, which struggle to achieve significant growth due to their size and market penetration. Small caps can expand into new markets, acquire new clients, or broaden their product range more easily than larger companies.

Moreover, small caps also serve as a diversification tool for investors. They often operate in different sectors, such as industrials and materials, and are more focused on local markets, providing exposure to structural trends like de-globalization. Sheridan noted that despite their potential, small caps remain under-researched and undervalued, offering opportunities for investors willing to conduct thorough research to identify quality growth companies. In addition, the persistent merger and acquisition activity, where larger companies acquire smaller ones at a premium, further supports the case for investing in small caps. According to Bloomberg, 95% of M&A deals involve a small-cap target, thereby adding substance to Sheridan’s argument. Lastly, Sheridan concluded by mentioning that small caps remain an undiscovered territory for many investors, requiring more effort to uncover hidden gems but offering substantial rewards for those who do.

Our Methodology

To curate the list of the 10 best small-cap growth stocks to buy now, we used the Finviz stock screener, Seeking Alpha, and Insider Monkey’s Q4 2024 hedge funds database. Using the screener we compiled an initial list of small-cap growth stocks. Next, we used Seeking Alpha to shortlist stocks that have grown more than 30% during the past 3 years. Lastly, we ranked the stocks in ascending order based on the number of hedge fund holders sourced from Insider Monkey’s database.

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 373.4% since May 2014, beating its benchmark by 218 percentage points (see more details here).

Red Cat Holdings, Inc. (NASDAQ:RCAT)

3-Year Sales Growth: 31.25%

Number of Hedge Fund Holders: 9

Red Cat Holdings, Inc. (NASDAQ:RCAT) specializes in providing products and services for the drone industry. It creates drones that are utilized by the military, government, and for consumer applications. Some of their notable drones include Golden Eagle drones that have been approved by the US Department of Defense for reconnaissance and public safety tasks.

The company recently came under the spotlight when it announced its partnership with Palantir Technologies Inc. to enhance the capabilities of its Black Widow drones. Under this partnership, Palantir’s VNav software will be integrated into Black Widow drones to enable autonomous navigation without relying on GPS. The partnership will make Black Widow drones more capable of military operations by enabling them to operate effectively in GPS-denied environments.

In addition to this, Red Cat Holdings, Inc. (NASDAQ:RCAT) on January 23, announced securing new orders worth $518,000 for its Edge 130 drones from the US Army National Guard and another U.S. Government Agency. This indicates a strong military and government use case for its drones. It is one of the best small-cap growth stocks to buy now.

Overall, RCAT ranks 10th on our list of  best small-cap growth stocks to buy now. While we acknowledge the potential of RCAT 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 time frame. If you are looking for an AI stock that is more promising than RCAT but that 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.