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 Vestis Corporation (NYSE:VSTS) 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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Vestis Corporation (NYSE:VSTS)
Number of Hedge Fund Holders: 34
Market Capitalization as of October 10, 2024: $1.96 Billion
Vestis Corporation (NYSE:VSTS), formerly referred to as Aramark Uniform Services, is a provider of rental uniforms and workplace supplies. The company services the automotive, food, manufacturing, healthcare, and cleanroom industries.
Some of its products include mops, uniforms, first aid kits, floor mats, towels, and linens. The company processes more than 345 million garments every day and services over 300,000 customers in more than 340 locations. Vestis Corporation (NYSE:VSTS) leverages technology to understand and address the unique needs of customers.
Vestis Corporation (NYSE:VSTS) believes its new delayered business structure and sales leadership will promise accelerated growth for the company ahead. In addition to that, the company witnessed an improvement in customer retention rates, validating its decision to decrease pricing. Overall, its new business structure is expected to generate $8 million in annualized gross returns.
The company’s new business structure and leadership are expected to turn things around for VSTS. As its retention rates suggest, the company has already begun to reap the benefits of the strategic changes Vestis (NYSE:VSTS) has committed to this year.
Overall, VSTS ranks 6th on our list of most promising small-cap stocks according to hedge funds. While we acknowledge the potential of VSTS 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 VSTS 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.
