We recently published a list of 10 Small Cap Stocks with High Potential. In this article, we are going to take a look at where Root, Inc. (NASDAQ:ROOT) stands against other small cap stocks with high potential.
As we transition from a tumultuous summer in the financial markets, characterized by rising expectations for interest rate cuts and the consequent impacts on stock and bond performances, investors are now navigating a landscape of heightened volatility and uncertainty. The small-cap segment of the stock market has garnered increasing attention in 2024, as expectations of a shift in monetary policy continue to evolve. Since early July, smaller companies have notably outperformed their larger peers, signaling a robust appetite for these stocks despite ongoing economic uncertainty. This trend has spurred interest among investors looking for high-growth potential opportunities within a more volatile market environment.
Nancy Prial, Co-CEO and Senior Portfolio Manager at Essex Investment Management, shared her optimistic outlook for small cap stocks in a recent interview with CNBC on September 30. Prial expects small cap stocks to gain momentum as a result of the rate cuts that have already occurred and additional expected reductions. According to Prial, small-cap stocks remain under-owned in the market and represent only a small percentage of the overall equity market. She highlighted that the conditions are ripe for a strong performance by smaller companies, provided there is a confidence boost from navigating a soft landing rather than a recession.
Prial emphasized that stock selection will be critical in this environment, as not all small-cap stocks are likely to benefit from rate cuts equally. She anticipates that some small-cap companies could see earnings growth in the range of 15% to 20% next year, driven by strong fundamentals and growth-oriented business models. According to Prial, while the broader indices may not deliver the same level of returns, select companies within the segment have the potential to outperform significantly.
As the outlook for the small-cap market brightens, sectors like technology are also poised to benefit from advancements in artificial intelligence and automation. Prial mentioned that these areas could drive innovation and growth within the small-cap segment, offering compelling opportunities for investors. With clear signals from central banks and ongoing technological developments, smaller companies are positioned to capitalize on emerging trends, making them an attractive option for those seeking to diversify and tap into high-potential stocks in the final quarter of the year.
Tom Lee, Head of Research at Fundstrat Global Advisors, echoes a similarly bullish sentiment. Lee believes that the recent volatility in small-cap stocks is part of a multi-year bottoming process, driven by economic data and investor expectations. Despite the unpredictability, Lee expects a significant rally in small-cap stocks once there is clarity on the rate cut cycle. He notes that small caps, which typically trade at 10 times forward price-to-earnings ratios, offer better earnings growth prospects than many mega-cap growth stocks. For Lee, the easing of monetary policy and improving fundamentals make small caps a compelling buy, even in the face of near-term volatility.
One of the primary drivers behind the renewed interest in small-cap stocks is the anticipated easing of monetary policy by central banks. As inflation cools down and economic growth slows, analysts widely expect a series of rate cuts in the coming months. Lower borrowing costs would benefit small-cap companies, which often rely on traditional bank loans instead of accessing corporate bond markets like their larger counterparts. As a result, smaller companies are likely to benefit more directly from the expected rate cuts, making them appealing investment opportunities as the economy starts to recover.
While optimism is building, investing in small-cap stocks does come with risks. A significant portion of these companies have reported negative earnings over the past year, emphasizing the need for a selective approach. Analysts recommend focusing on profitable sectors such as financials, utilities, and consumer discretionary, which have shown resilience despite economic headwinds. Financials, for instance, have delivered robust earnings, while utilities have performed well, although they represent a smaller portion of the market capitalization.
By diversifying portfolios with strategically selected small-cap investments and leveraging the stabilizing power of bonds, investors can position themselves to not only weather market fluctuations but also thrive in the evolving economic environment. The remainder of 2024 could very well be a pivotal period for small-cap stocks, providing opportunities for those willing to embrace the associated risks and rewards.
Our Methodology
For this article, we used the Finviz screener and identified 20 stocks with market cap of less than $2 billion and having Buy or Buy-equivalent ratings and traget price 40% above current price from analysts as of October 5. These stocks have also gained more than 100% in value year to date in 2024. Next, we examined Insider Monkey’s data on 912 hedge funds as of Q2 2024. We narrowed down our list to 10 stocks most widely held by institutional investors and ranked them in ascending order of the number of hedge funds that have stakes in them as of Q2 of 2024.
At Insider Monkey we are obsessed with 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).
An experienced insurance agent explaining the benefits of an insurance product to a customer.
Root, Inc. (NASDAQ:ROOT)
Number of Hedge Fund Holders: 11
Market Cap as of October 5: 598.20 Million
Average Analysts’ Target Price as of October 5: $70.43
Year to date Share Price Gain: 280.53%
Root, Inc. (NASDAQ:ROOT) is a small-cap insurance provider in the United States that specializes in automobile, homeowners, and renters insurance. The company employs a direct-to-consumer model, serving customers primarily through its mobile applications and website, as well as through digital and media channels, distribution partners, and agencies. Headquartered in Columbus, Ohio, Root, Inc. (NASDAQ:ROOT) was founded in 2015 and has quickly established itself as an innovative player in the insurance industry through its data-driven approach and advanced technology.
Root, Inc. (NASDAQ:ROOT) stands out as a small-cap stock with high potential due to its strong financial performance and effective use of proprietary data science to streamline operations and improve customer service. For the second quarter of 2024, Root reported operating income of $4 million and positive adjusted EBITDA of $12 million, both achieved for the second consecutive quarter. The company’s net loss was $8 million, a significant 79% year-over-year improvement. Root, Inc. (NASDAQ:ROOT) disciplined underwriting and focus on reducing expenses have contributed to a gross loss ratio of 61.6%, demonstrating its operational efficiency and strong risk management capabilities.
The company’s direct channel is its primary source of new business, and it continues to show strong growth potential. Root leverages its proprietary technology and machine learning models to optimize pricing and deliver a better experience to customers. This approach has allowed Root to achieve some of the best loss ratios in the industry while maintaining a focus on profitability. Furthermore, Root, Inc. (NASDAQ:ROOT) has made substantial progress within its partnership channel, growing new writings by 120% year-over-year. With more than a dozen partners and a robust pipeline of additional opportunities, the company is well-positioned to drive further growth.
Root, Inc. (NASDAQ:ROOT) strong financial metrics, including a 62% gross accident period loss ratio and positive operating cash flow for the fourth consecutive quarter, are a testament to its disciplined strategy and effective use of data. As Root, Inc. (NASDAQ:ROOT) continues to expand its footprint and integrate its technology into new channels, it has the potential to become a leading personal lines insurance carrier in the U.S.
Overall, ROOT ranks 8th on our list of small cap stocks with high potential. While we acknowledge the potential of ROOT to grow, our conviction lies in the belief that some 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 ROOT 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.