We recently published a list of 10 Oversold Small Cap Stocks to Buy Right Now. In this article, we are going to take a look at where LegalZoom.com, Inc. (NASDAQ:LZ) stands against other oversold small cap stocks to buy right now.
Market experts believe that the rally in the small-cap stocks might be just getting started.
Data suggested that the benchmark small-cap stock index, Russell 2000, saw an increase of more than 9% between early July and September end. This means that the small-cap index surpassed the S&P 500 index’s return of more than ~4%. The strong performance of the small-cap index primarily stemmed from the rotation into small-cap stocks in July as the investors believed that there would be rate cuts moving forward. These expectations finally materialized when the US Fed announced a mega 50-basis-point drop, with the projections of further cuts. As per Wall Street experts, the small-cap stocks saw a significant increase on the news.
Now that we are in the last quarter of the year, many investors wonder whether or not this rally is sustainable. However, market strategists believe that this rally has the potential to sustain, and 2025 will see strong outperformance.
Small-Caps in 2025: The Road Ahead
Why is a rate-cutting cycle beneficial for small-cap stocks? Smaller companies tend to be dependent more on floating-rate debt as compared to large-cap companies for their funding needs. Therefore, as and when the rates go down, the cost of debt will also be reduced, enabling small-cap companies to borrow more. Therefore, small businesses tend to benefit financially as their interest costs will decline. This should boost the earnings of small-cap companies.
Jill Carey Hall, who is the head of US small and mid-cap strategy at Bank of America, explained that the small-caps tend to outpace the returns delivered by the large-caps by approximately 1 percentage point. This happens over the 6 months post a 50-bps cut.
BlackRock believes that, if the market continues its upward trajectory, the small-cap space can demonstrate dynamism. Small-cap stocks are more sensitive to broader economic cycles, and history suggests that small caps benefit most during the expansionary cycles. The valuations for these firms and an environment of improved EPS growth should result in delivering competitive returns, as per the firm. These favorable characteristics, together with the US economic gains, and the infrastructure investment should help accelerate earnings for the smaller firms.
READ ALSO: 7 Best Stocks to Buy For Long-Term and 8 Cheap Jim Cramer Stocks to Invest In.
What Should Investors Expect from Small Cap Stocks?
As per Francis Gannon, Co-Chief Investment Officer and Managing Director of Royce Investment Partners, small-caps have an advantage over large-caps concerning estimated earnings growth for 2025. Moreover, he believes that small-caps had better returns than large-caps following the previous 10 presidential elections. This was the case irrespective of the fact that which party won the White House. Such an outcome was seen despite every election having its own set of challenges, difficulties, and opportunities. Therefore, he believes that it’s not about the person or policies as much as the investors pay attention to the uncertainty that prevails in the months before any elections.
As per Gannon, inflation has been moderating, the economy continues to grow, unemployment remains low, and there has been normalization in the rates. Also, the benefits of reshoring and the CHIPS Act are now visible. Additionally, he believes that there has been a positive reversion to the mean argument for the small-cap leadership as well as strong performance.
Our Methodology
To list 10 Oversold Small Cap Stocks to Buy Right Now, we used a Finviz screener to extract the stocks having the market cap of less than $2 billion. After getting the list of 20-25 stocks, we narrowed it down to the following 10 stocks by selecting the ones trading at a forward P/E of less than 15.0x and which have fallen significantly on a YTD basis. Finally, the stocks were ranked in the 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).
16 Best Franchises to Open With $10K in 2023
LegalZoom.com, Inc. (NASDAQ:LZ)
Market Cap (As of October 22): $1.21 billion
Forward P/E (As of October 22): 12.28x
% Decline on a YTD Basis: ~37%
Number of Hedge Fund Holders: 26
LegalZoom.com, Inc. (NASDAQ:LZ) operates an online platform, supporting the legal, compliance, and business management needs of small businesses and consumers in the US.
LegalZoom.com, Inc. (NASDAQ:LZ) has been undertaking a strategic review of its go-to-market and product strategies. It continues to focus on subscription-oriented offerings. This move can potentially improve revenue visibility and customer retention. The company rolled out a new mobile experience, which demonstrated promising early results. Moreover, LegalZoom.com, Inc. (NASDAQ:LZ) has been exploring new advertising strategies that are focused on affordability instead of free services, hinting at a potential shift away from the freemium model.
The company plans to increase its brand investments, which include a partnership with the NBA. Such marketing initiatives should fuel its topline trends in H2 2024 as LegalZoom.com, Inc. (NASDAQ:LZ) targets to reinforce its brand presence and onboard new customers. Its emphasis on improving post-formation sales motion might result in higher retention rates and increased revenue per customer. By using initial touchpoints with entrepreneurs, LegalZoom.com, Inc. (NASDAQ:LZ) can be an integral part of a business’s growth journey, providing legal and compliance services as and when these companies expand.
Moving forward, the company’s brand recognition and established market presence are expected to act as potential tailwinds. As more businesses and individuals focus on digital solutions for legal needs, LegalZoom.com, Inc. (NASDAQ:LZ)’s platform and expertise should drive sustained growth over the long term.
Jefferies Financial Group upgraded the shares of LegalZoom.com, Inc. (NASDAQ:LZ) from a “Hold” rating to a “Buy” rating, setting a $8.00 price target on 31st July. Meridian Funds, managed by ArrowMark Partners, released a second quarter 2024 investor letter. Here is what the fund said:
“LegalZoom.com, Inc. (NASDAQ:LZ) is a leading online platform providing small businesses with legal, compliance, and tax services that allow them to start and operate within the required regulations. The stock underperformed during Q2 on weak guidance from management that indicated its small businesses, the company’s core customers, were under pressure. We believe that the company will continue to gain share due to its strong brand and network effects which will allow them to sell a broad range of services to small businesses. We also see room for significant operating leverage as the expanded range of products and services begins to generate revenue after several years of investment. We added to our position during the period on share price weakness.”
Overall, LZ ranks 3rd on our list of oversold small cap stocks to buy right now. While we acknowledge the potential of LZ as an investment, our conviction lies in the belief that some deeply undervalued AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for a deeply undervalued AI stock that is more promising than LZ 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.
