We recently published a list of the 10 Most Undervalued Small-Cap Stocks To Invest In. In this article, we are going to take a look at where Silicon Motion Technology Corp. (NASDAQ:SIMO) stands against other most undervalued small-cap stocks to invest in.
Is Now the Time for Small Caps to Shine?
On January 24, Raymond James Investment Management’s chief market strategist, Matt Orton, appeared on CNBC’s ‘Power Lunch’ to discuss the earnings season and small-cap stocks. Orton believes that the earnings season so far has been very constructive. The unique thing about this earnings season is that it isn’t dominated by a few companies that are doing really well. Instead, the last few quarters have seen an expansion in earnings breadth in several different sectors.
Financials are finally participating in earnings, which holds immense significance. He said that one of the key opportunities he sees in the market at present is a down market cap. Small caps have not participated in much of the upside of the bull market for the past three years because they haven’t had earnings. However, the market is finally seeing an inflection point. Orton says that the key to these market dynamics is selectivity. You can’t just own the Russell 2000 and expect to outperform. Instead, it would be prudent to focus on the market cap and valuation opportunities.
Other experts are reflecting similar expectations. On February 14, Stacey Sears, Emerald Advisers portfolio manager, appeared on ‘Squawk Box’ to talk about the small-cap stock performance and market trends, among other things. She said that earnings growth in this season is coming ahead of expectations. Small caps have essentially been in an earnings recession over the better part of the last two years. She said that fiscal Q4 2024 was the first quarter they expected earnings to turn positive year-over-year, and the data shows that they are outpacing those expectations. The earnings projections were around 2% growth, but they are tracking the growth of high-single digits. The breadth of the outperformance is also encouraging, as the market is seeing a really nice upside within financials, healthcare, and technology. Revisions ratios are turning positive.
Typically, for small caps, the year starts with positive expectations, which gradually get tamped down as the year progresses. However, this year, the market is seeing the expectations hold in, which is highly encouraging for recovery in an asset class that has lagged for the better part of the last two years.
READ ALSO: 10 Best Drug Stocks to Buy Now and 10 Best Food Stocks To Buy Under $20.
Is the Trump Administration a Tailwind for Small Caps?
Experts believe that the Trump administration may create solid tailwinds for two market groups drastically different from each other: small-cap stocks and big banks. While bank stocks are rallying, VettaFi’s Todd Rosenbluth anticipated that small-cap stocks may be one of the biggest players under Trump’s administration. He said that small-caps are majorly shielded from tariff threats and reshoring. CNBC reported that he voiced the following about the scenario:
“If we have a focus on the U.S. and making America even stronger, then small-cap companies stand to benefit from that because they have less multinational exposure.”
Since small-cap stocks do not have as significant multinational exposure as large or mid-caps, they are less likely to face uncertainty during market volatility.
Our Methodology
We sifted through stock screeners, online rankings, and ETFs to compile a list of 20 stocks with a forward P/E of less than 20 and a market cap between $300 million and $2 billion. We then selected the top 10 stocks that were the most popular among elite hedge funds as of Q3 2024. We sourced the hedge fund sentiment data from Insider Monkey’s database. The list is sorted in ascending order of hedge fund sentiment. Please note that the P/E ratios are as of February 14, 2025.
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).
An engineer in a lab coat tweaking a circuit board with intricate semiconductors.
Silicon Motion Technology Corp. (NASDAQ:SIMO)
Market Cap: $1.89 billion
Forward P/E: 16
Number of Hedge Fund Holders: 34
Silicon Motion Technology Corp. (NASDAQ:SIMO) develops, manufactures, and supplies semiconductor products for the electronics market. Its products include Storage Solutions, Flash Controllers, and others. The company offers embedded graphics, embedded and expandable storage, and radio frequency integrated circuits. It was founded in 1995 and is headquartered in Hong Kong.
2024 was an exceptional year for Silicon Motion Technology Corp. (NASDAQ:SIMO). It delivered 25% year-over-year revenue growth, outperforming its end market. Its gross margin also improved to over 46% from 43%, and its operating margin grew 11.9% compared to 2023. Simultaneously, the company continued investing in next-generation solutions to expand its opportunities for long-term share gains and sustainable revenue growth.
Despite weak end-user demand in the second half of 2024, Silicon Motion Technology Corp. (NASDAQ:SIMO) remained focused on its execution and taped out several advanced controller replacements that led to significant new project wins with customers. The company also successfully entered the enterprise SSD market, adding six customers to its portfolio and beginning the initial shipment of its first new Mount Titan product in the second half of 2024. Since the PC and smartphone market is expected to remain significant, the company’s strategy to diversify its enterprise is off to a strong start and is anticipated to scale over the next few years.
Focus Capital Management stated the following regarding Silicon Motion Technology Corporation (NASDAQ:SIMO) in its Q4 2024 investor letter:
“Silicon Motion Technology Corporation (NASDAQ:SIMO) designs and sells controllers that manage the NAND flash memory ubiquitous in modern computing. Wherever there is NAND flash, there must be a controller, often one from Silicon Motion. SIMO is an ADR (American Depository Receipt) trading on the NASDAQ.
2024 — Growth Across the Board: We just recently discussed at some length in our third quarter letter about Silicon Motion’s strengthening industry position, increasing market share, and growing revenue and margins. Over 2024, revenue has grown 25%+, gross margin has expanded 500 basis points, and net income has about doubled. We will not repeat our points from there at length. We will simply suffice with saying that the future looks even brighter, with continued growth in their core market segments as well as significant growth from their entry into new market segments. Silicon Motion’s entry into the high-end PC market with their PCIe 5.0 controllers is off to a very strong start with major design wins. In fact, Silicon Motion has stated that based on their present design win pipeline, they expect to attain about 50% market share in the high-end PC segment over the next few years, from their present standing start. And their MonTitan enterprise controllers for AI and data centers have already garnered multiple Tier 1 customer wins, with more expected to come, in what is again a greenfield opportunity for the company…” (Click here to read the full text)
Overall, SIMO ranks 2nd on our list of the most undervalued small-cap stocks to invest in. While we acknowledge the potential of SIMO, 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 SIMO 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.
