We recently published a list of 7 Cheap Small-Cap Stocks To Buy Now. In this article, we are going to take a look at where The Gap, Inc. (NYSE:GAP) stands against the other cheap small-cap stocks to buy now.
At the September Fed meeting, the Federal Open Market Committee (FOMC) decided to lower its policy interest rate by 50 basis points to support the economy. Chairman Jerome Powell stated that this move is aimed at maintaining labor market strength while reducing inflation.
He also noted that future rate adjustments will depend on incoming economic data. The Fed’s economic projections indicate a federal funds rate of 4.4% by year-end, with further rate cuts expected as inflation falls and unemployment edges up slightly.
The market seems quite happy with the current cut cycle and expects more to come. According to CME’s Fed-watch tool, the market is expecting another 25 to 50 bps cut at the November meeting. As of September 27, 53.3% interest rate traders expect a 50 bps cut while the rest are anticipating a 25 bps cut.
While the market had gotten used to the high rates and was still thriving, the lower fed funds rates have given a much-needed boost as the broader market reached new highs.
Fed Easing Cycle Boosts Optimism for Small Cap Stocks
Greg Tuorto, a portfolio manager at Goldman Sachs Asset Management, recently joined Catalysts on Yahoo Finance and discussed the outlook for small-cap stocks in light of recent Federal Reserve rate cuts and broader economic conditions.
He highlighted several supportive factors for small caps, including a stable U.S. economy and opportunities in sectors like technology, healthcare, and consumer industries. Despite recent underperformance, he believes small caps are positioned for a rebound, driven by strong earnings growth rather than multiple expansions.
Tuorto also emphasized the potential for small caps to outperform large caps in 2025, given that their earnings outlook appears more favorable. He sees the ongoing Fed easing cycle as a tailwind and suggests that businesses have adapted well to the higher rate environment and could benefit significantly from any further rate cuts. While Tuorto isn’t focused on the exact number of cuts, he sees the broader trajectory as a positive catalyst.
The portfolio manager is especially bullish on software stocks and noted that lower rates make this sector more attractive, and he expects more IPO activity in the space in the coming months. For the future, Greg Tuorto also believes that there will be another cut probably in the near future.7 Cheap Small-Cap Stocks To Buy
Our Methodology
For this article, we used the Finviz stock screener to identify nearly 150 small-cap stocks with positive forward price-to-earnings ratios. Our definition for small-cap stocks was stocks between $1 billion to $10 billion. Next, we narrowed our list to stocks whose earnings are expected to grow this year according to analysts, compared to the prior year, and have forward PE ratios below 15. Finally, we chose 7 stocks that were most widely held by institutional investors. The 7 cheap small-cap stocks to buy are listed in ascending order of their hedge fund sentiment, as of Q2 2024.
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).
Is The Gap, Inc. (NYSE:GAP) A Cheap Small-Cap Stock To Buy Now?
The Gap, Inc. (NYSE:GAP)
PE Ratio (FWD): 11.45
Number of Hedge Fund Holders: 39
The Gap, Inc. (NYSE:GAP) is an American retailer known for its clothing and accessories. The company operates several notable brands including its namesake Gap, Banana Republic, Old Navy, and Athleta. It takes the 5th spot on our list of cheap small cap stocks to buy now.
The company offers a wide range of casual and trendy clothing and its retail approach combines physical stores with online shopping, making it easier for customers to shop. They provide convenient services like curbside pickup and the option to buy online and pick up in-store.
On September 24, Gap (NYSE:GAP) announced that it is expanding its partnership with Disney with new apparel collaborations that feature classic Gap styles combined with popular Disney characters.
These limited-edition collections will be seasonal and offer stylish designs that differ from the usual Gap × Disney products. The first release called the Gap × Disney Collegiate collection, draws inspiration from ’90s varsity styles and includes clothing and accessories featuring Mickey & Friends alongside Gap’s logo.
The collection has patchwork varsity prints in preppy colors and collegiate fonts, with items like the Gap × Disney Denim Big Shirt displaying Mickey & Friends on the back. It also features matching fleece sets and unique denim styles with Mickey designs, available for adults, kids, toddlers, and babies, priced between $14 and $149.
In Q2, Gap (NYSE:GAP) reported strong financial results, marking its sixth consecutive quarter of market share growth. The company generated net sales of $3.7 billion, up 5% from the previous year, with comparable sales increasing by 3%. Store sales rose by 4%, and the company operated 3,568 stores in around 40 countries by the end of the quarter, with 2,541 being company-operated locations. Online sales also grew by 7%, accounting for 33% of total net sales.
In addition, it reported a net income of $206 million, with diluted earnings per share of $0.54. The company closed the quarter with $2.1 billion in cash and short-term investments, a 59% increase from last year. Net cash from operating activities reached $579 million, while free cash flow was $397 million.
For 2024, analysts expect a nearly 31% year-over-year increase in its EPS. As of September 27, Gap (NYSE:GAP) is trading at a forward PE multiple of 11.45x, nearly 34% below its sector median of 17.34.
Overall, GAP ranks 5th on our list of cheap small-cap stocks to buy now. While we acknowledge the potential of GAP 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 GAP but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
Read Next: $30 Trillion Opportunity: 15 Best Humanoid Robot Stocks to Buy According to Morgan Stanley and Jim Cramer Says NVIDIA ‘Has Become A Wasteland’.
Disclosure: None. This article is originally published at Insider Monkey.