We recently published a list of 8 Most Undervalued Small-Cap Stocks To Buy According To Analysts. In this article, we are going to take a look at where Matador Resources Co. (NYSE:MTDR) stands against the other most undervalued small-cap stocks to buy according to analysts.
Is a Multi-Year Small-Cap Cycle Ahead?
The landscape for small and mid-cap companies is becoming increasingly exciting in light of the Fed’s recent rate cuts, which could unlock significant investment opportunities. While the Russell 2000 index has lagged behind larger averages, analysts are optimistic about the growth potential of these stocks as market conditions improve.
Many small and mid-cap companies are well-positioned to capitalize on the favorable economic environment, with innovative strategies and strong fundamentals that can drive demand and market share. As interest rates stabilize and investor confidence grows, these companies are likely to attract renewed attention from investors seeking high-growth opportunities.
With the current environment ripe for exploration, there has never been a better time for investors to consider small and mid-cap stocks. Such was the sentiment of Curtis Nagel, senior US SMid cap internet analyst at BofA Securities, who spoke on this market scenario on CNBC earlier. We covered his opinion in another one of our articles, 7 Best Small Company Stocks To Invest In. Here’s an excerpt from it:
“…he believes this could spell big opportunities for SMID-cap stocks across various sectors, including home furnishings and subscription services.
Nagel specifically pointed out Restoration Hardware, noting that it is a household name that often flies under the radar… Nagel’s overall thesis focuses on updating price targets for companies with high sensitivity to interest rates and strong prospects for revenue and earnings growth in a soft landing scenario. ACV Auctions was highlighted as an intriguing opportunity. Nagel described it as a digital marketplace for wholesale vehicles where dealerships trade cars. He noted that this market has not been fully digitized yet, placing the company at the forefront of this transition. Although the wholesale vehicle market has faced challenges, down about 25% relative to historic averages, Nagel theorized that as interest rates improve and car affordability increases, the company could see a market rebound. He views this stock as potentially overlooked but having significant upside.”
In an interview on CNBC on September 30, Nancy Prial, Co-CEO & Senior Portfolio Manager at Essex Investment Management, expressed that she expects small-cap stocks to grow, driven by rate cuts and stock-picking opportunities.
Prial noted that small caps have been outperforming in the third quarter, largely driven by expectations of rate cuts, with a 50 basis point reduction being more significant than previously anticipated. She expressed optimism that small caps have substantial room to grow, emphasizing that this could mark the beginning of a multi-year cycle for these stocks. Currently, small-cap stocks are underrepresented in the market, comprising just under 5% of the total equity market, which is at record lows. This low ownership level presents an attractive opportunity for investors.
She pointed out that small-cap stocks remain significantly undervalued compared to their larger counterparts. Prial argued that for small caps to gain traction, several conditions must be met: the continuation of rate cuts, confidence in navigating a soft landing rather than a recession and expanding relative earnings growth. She noted that relative earnings growth for small caps is starting to improve and is expected to surpass that of large caps by the end of the year.
When asked about overall market estimates, Prial acknowledged that while the S&P 500 is projected to see earnings growth of 13% in the fourth quarter and 15% in 2025, she believes small caps could exceed these figures. Despite a slight slowdown in economic growth, she maintained that small-cap stocks could achieve earnings growth rates between 15% and 20% next year. She cautioned, however, that overall indices might not reflect this growth as estimates often start high before being revised downward.
Prial also discussed her investment picks related to infrastructure and near-shoring, specifically mentioning Clean Harbors. While acknowledging its strong performance in Q3, she clarified that they do not expect new legislation from Washington to drive further gains. Instead, she believes companies like this will benefit from existing bills that are now being implemented. Additionally, she highlighted Arcosa as a “picks and shovels” play within the sector, emphasizing its role in supporting the build-out of artificial intelligence infrastructure and digitalization efforts across various industries.
Her insights reflect a bullish outlook on small-cap stocks amid changing economic conditions and anticipated monetary policy shifts. By focusing on strategic stock selection and recognizing the potential for earnings growth within this sector, investors may find compelling opportunities as they navigate the evolving market landscape.
Methodology
We used stock screeners to look for companies trading between $1 billion and $10 billion, that’s our definition of small-cap stocks. We then found 25 stocks with a forward price-to-earnings ratio under 15, and an upside potential of over 20%. We then selected the 8 stocks that were the most popular among elite hedge funds and that analysts were bullish on. The stocks are ranked in ascending order of their analysts’ upside potential.
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).
A pipeline snaking its way through the hills and valleys of the Delaware Basin.
Matador Resources Co. (NYSE:MTDR)
Forward Price-to-Earnings Ratio: 5.41
Average Upside Potential: 43.18%
Number of Hedge Fund Holders: 37
Matador Resources Co. (NYSE:MTDR) is an independent oil and gas exploration and production company operating primarily in the US. It focuses on developing unconventional oil and gas resources, particularly in the Permian Basin. It’s known for its efficient operations, low-cost production, and strong focus on maximizing shareholder value.
The company made $847.14 million in revenue for the second quarter of 2024, up 32.76% from a year-ago period. The earnings per share were $2.05. Both of these values beat analyst expectations for the quarter. It has a strong financial foundation, evidenced by its high Return on Equity of 21%, which is significantly higher than the industry average of 16%. This has contributed to impressive earnings growth of 44% in the last 5 years.
The company reinvests a substantial portion of its profits back into the business, indicating a commitment to growth. While analysts predict slower earnings growth in the future, its strong financials suggest that the market might be undervaluing the company.
The company recently completed its $1.832 billion acquisition of a subsidiary of Ameredev II Parent, LLC on September 19. This strategic move expands Matador Resources Co.’s (NYSE:MTDR) footprint in the Delaware Basin, a key US oil and gas region. The acquired assets include ~33,500 contiguous net acres in the Delaware Basin, with significant production potential. It plans to leverage operational efficiencies to generate synergies and increase production. The acquisition also adds 118 million barrels of oil equivalent in proved reserves.
Given its robust financials, operational efficiency, and commitment to shareholder value, the company is a promising investment option.
TimesSquare Capital U.S. Small Cap Growth Strategy stated the following regarding Matador Resources Company (NYSE:MTDR) in its first quarter 2024 investor letter:
“We often see the ebb and flow of the Energy sector tied to underlying commodity prices. In this area, we seek low-cost exploration & production companies with high-yielding acreage or specialized service providers. Matador Resources Company (NYSE:MTDR) is an exploration and production company with operations in the Delaware Basin of Southeast New Mexico and West Texas. Its shares were boosted 18% by a solid fourth quarter with higher-than-expected production volume and lower operating expenses.”
Overall MTDR ranks 4th on our list of most undervalued small-cap stocks to buy according to analysts. While we acknowledge the growth potential of MTDR as an investment, our conviction lies in the belief that AI stocks hold great promise for delivering high returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than MTDR 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.