We recently published a list of 10 Most Promising Small-Cap Stocks According to Hedge Funds. In this article, we are going to take a look at where PHINIA Inc. (NYSE:PHIN) stands against other most promising small-cap stocks.
Small-Cap Stocks are Expected to Offer Higher Returns in 2025
Small-cap stocks are offering a myriad of opportunities to investors and are expected to go higher. On September 25, Greg Tuorto, Goldman Sachs asset management portfolio manager, appeared in an interview on Yahoo Finance to discuss his thesis on small-cap stocks.
There have been several tailwinds for small-cap stocks, which may have been ignored previously. However, now that the economy is stabilizing, investors may find a variety of undervalued names in the healthcare and technology sectors especially.
Tuorto further added that small-cap stocks have been underperforming for three years, however, in 2024, there is a lot of pent-up opportunity in this area. A year from now, small-cap stocks are expected to deliver unprecedented returns as the economy continues to grow. He expects more IPOs and mergers and acquisitions to come through before 2024 comes to a close.
Nancy Prial, Co-CEO & Senior Portfolio Manager at Essex Investment Management, is also bullish on small caps. We recently covered her views in our article on the 8 Most Undervalued Small-Cap Stocks To Buy According To Analysts. Here’s an excerpt from it:
“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.”
Biotechs Set to Raise Millions in IPOs
The biotechnology sector is growing rapidly and a large number of startups are expected to go public. On October 7, Reuters reported that three startups are set to raise $400 million in their initial public offerings, amid the sector’s second IPO boom. In September, several drug developers made their market debuts, raising more than $900 million in their IPOs, encouraging other startups to follow suit.
While there is uncertainty around the presidential elections in the United States, biotechnology startups and companies are benefiting from the declining rate cuts. Experts polled by Reuters suggest that biotech companies are of the view that they should exploit the current market momentum rather than wait for presidential elections to normalize the market. However, this also puts immense pressure on other biotech companies to go public as soon as possible.
Our Methodology
To find the most promising small-cap stocks according to hedge funds, we used the Finviz stock screener. We set the market capitalization filter to range between $300 million and $2 billion. We then examined the hedge fund sentiment of these stocks as of Q2 2024 and picked the most popular ones. The stocks are sorted in ascending order of the number of hedge fund holders 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).
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PHINIA Inc. (NYSE:PHIN)
Number of Hedge Fund Holders: 35
Market Capitalization as of October 10, 2024: $1.96 Billion
With 35 hedge funds bullish on PHIN as of Q2 2024, the company ranks third on our list of the most promising small-cap stocks according to hedge funds. PHINIA Inc. (NYSE:PHIN) is a fuel-efficient company that develops and supplies fuel injection systems for the automotive and industrial sectors. Some of its products include alternative fuel systems, evaporative canisters, electrical systems, fuel delivery modules, and hydrogen solutions.
The company is committed to sustainability and is making significant investments to reduce carbon emissions. In September, PHINIA Inc. (NYSE:PHIN) launched a first-to-market technology that reduces emissions and increases fuel efficiency for small highway diesel engines. For the fiscal year ended 2023, the company invested 78% of its research and development spend in fuel efficiency and alternative technology initiatives. Of this 30% was directed to zero and low-carbon fuel systems.
In the second quarter of 2024, PHINIA Inc. (NYSE:PHIN) logged $863 million in revenue. Through the decade, the company grew its organic sales at a compound annual growth rate of 2% to 4%. Revenue growth was primarily driven by non-contractual commercial negotiations and increasing sales in Europe for its aftermarket segment. However, vehicle sales were slower in the region but were offset by aftermarket sales.
For the complete fiscal year 2024, PHINIA Inc. (NYSE:PHIN) expects revenue to range between $3.4 billion to $3.6 billion. The company has a diverse range of offerings and has strong fundamentals, allowing it to meet the growing demand for carbon-free solutions.
Ariel Investments’ Ariel Focus Fund stated the following regarding PHINIA Inc. (NYSE:PHIN) in its first quarter 2024 investor letter:
“Manufacturer of premium fuel and electrical systems, Phinia Inc. (PHIN) also traded up in the period on solid earnings results and a positive full year 2024 outlook. Healthy consumer pricing, new business wins across all end markets, ongoing weakness in electric vehicles, growth in light vehicle original equipment and strong cost controls, more than offset disappointing commercial vehicle sales in China. Meanwhile, management continues to prioritize capital returns to shareholders via buybacks and dividends. Looking ahead, we expect PHIN to deliver sustainable, profitable growth and significant cash generation as it captures operational efficiencies, exits agreements with its former parent company BorgWarner Inc. and also expands its industrial and aftermarket customer base.”
Overall, PHIN ranks 3rd on our list of most promising small-cap stocks according to hedge funds. While we acknowledge the potential of PHIN 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 PHIN 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.
