We recently compiled a list of the 12 Best Small Cap Tech Stocks to Buy. In this article, we are going to take a look at where Smartsheet Inc. (NYSE:SMAR) stands against the best small-cap tech stocks to buy.
US Inflation and the Anticipated Fed Cuts
Inflation in the US may have reached a 3-year low of 2.6% in August, the lowest rate since March 2021, according to a survey of economists by FactSet. Core inflation, excluding food and energy prices, is believed to have remained at 3.2%.
Inflation peaked at a 4-decade high of 9.1% in June 2022 as the economy rebounded rapidly from the pandemic recession. The Fed responded with 11 rate hikes in 2022 and 2023, raising its key rate to a 23-year high and significantly increasing borrowing costs across the economy. The easing of inflation may pave the way for the Fed to start cutting interest rates next week.
AP News reported that Fed officials think that inflation is steadily declining towards their 2% target. Reducing the Fed’s benchmark rate is expected to lower borrowing costs for consumers and businesses. Christopher Waller, a key Fed policymaker, noted that over half of tracked goods and services have seen annual inflation drop below 2.5%.
Craig Johnson, Chief Market Technician at Piper Sandler & Co., and Gene Goldman, Cetera’s CIO, recently came together to discuss the Fed’s interest rate cuts, and stock sector performance.
Gene Goldman expressed that his base case anticipates 3 rate cuts of 25 basis points each, beginning in September. His belief lies in the slowing inflation, a deceleration in economic growth, and the overall resilience of the economy, which he thinks is not as dire as some reports suggest. Goldman noted that while the labor market showed mixed signals, with both positive and negative data, the market’s expectations for deeper rate cuts may be exaggerated. Goldman acknowledged that political uncertainties could also contribute to market fluctuations.
Craig Johnson was also of the opinion that a 25 basis point cut is already anticipated by the market, suggesting that a 50 basis point cut could raise concerns among investors. He believes that a series of 25 basis point cuts would align with their perspective. Craig emphasized the importance of staying calm considering that, historically, October has been a strong month for the markets, with gains observed 86% of the time since 1929.
Johnson acknowledged that while there has been a recent pullback, particularly following the worst week for the markets since March 2023, there has been a rebound with the Nasdaq and S&P showing positive movements. He highlighted the necessity of dissecting the performance of the MAG 7 tech stocks, which he believes are now lagging. Instead, he pointed out that there are promising stocks within the $2 to $10 billion range that demonstrate solid growth potential, both at the top and bottom lines, and appear constructive on the charts.
He noted the Nasdaq’s 0.75% rebound but referred to it as a dead cat bounce, indicating that a more substantial recovery of 8-10% could be on the horizon. He attributed the day’s positive market sentiment to an employment report that exceeded expectations.
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 sorted our screen by market cap and looked through the top 25 stocks that matched our criteria. We then selected 12 stocks that were the most popular among elite hedge funds and that analysts were bullish on. The stocks are ranked in ascending order of the number of hedge funds that have stakes in them, 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).
Smartsheet Inc. (NYSE:SMAR)
Market Capitalization as of September 11: $7.12 billion
Number of Hedge Fund Holders: 57
Smartsheet Inc. (NYSE:SMAR) is a cloud-based work management platform offering collaborative workspaces by helping teams plan, track, and manage projects and tasks. It offers features like Gantt charts, Kanban boards, and real-time collaboration tools, making it a popular choice for businesses of all sizes.
In June, the company launched a new pricing and packaging model, that offers more flexibility and options for customers. It simplifies pricing, allows for more users, and provides broader access to features. 1000s of new customers have started using the new pricing model.
Smartsheet Inc. (NYSE:SMAR) had a strong second quarter of fiscal 2025, with 75 customers increasing their spending by over $100,000. It now has 77 customers spending over $1 million per year, which is a 50% increase from last year. The annual recurring revenue is $1.093 billion, and the company over 15.3 million users. Total revenue generated in FQ2 2025 was $276.41 million, recording a 17.33% improvement from the same quarter last fiscal year.
It signed new customers like Intuit, Skechers, and City National Bank. There was a recent large deal with a Big 4 consulting firm to use Smartsheet Inc. (NYSE:SMAR) to streamline their client engagement. This customer estimates that Smartsheet Inc. (NYSE:SMAR) saved their team 39,000 working hours and reduced their project delivery costs by nearly 12%.
With strong growth, innovative features, and a focus on customer satisfaction, the company is well-positioned for continued success. It is held by 57 hedge funds, of which the largest position is $285,050,902 by Vista Equity Partners.
Brown Capital Management Small Company Fund stated the following regarding Smartsheet Inc. (NYSE:SMAR) in its Q2 2024 investor letter:
“Second, our portfolio holdings are well positioned to exploit future opportunities. We invest in many companies that are producing AI-based applications for their businesses and customers. Examples include enterprise-software companies with industry-specific data, such as Appfolio (APPF) and Smartsheet Inc. (NYSE:SMAR). Recently Appfolio released updated Generative AI features that help users increase productivity through automation. Smartsheet has integrated AI features into its services, including formula generation, data analytics and a chat bot. Investing in AI now, even though overall revenue growth is depressed, will leave these companies with even better products. Additionally, adoption of these tools could lead to more licenses sold as well as higher-priced licenses per user.”
Overall SMAR ranks 2nd on our list of the best small-cap tech stocks to buy. While we acknowledge the potential of SMAR 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 the stocks on our list 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.
