We recently published a list of the 10 Most Undervalued Small-Cap Stocks To Invest In. In this article, we are going to take a look at where Carter’s, Inc. (NYSE:CRI) stands against other most undervalued small-cap stocks to invest in.
Is Now the Time for Small Caps to Shine?
On January 24, Raymond James Investment Management’s chief market strategist, Matt Orton, appeared on CNBC’s ‘Power Lunch’ to discuss the earnings season and small-cap stocks. Orton believes that the earnings season so far has been very constructive. The unique thing about this earnings season is that it isn’t dominated by a few companies that are doing really well. Instead, the last few quarters have seen an expansion in earnings breadth in several different sectors.
Financials are finally participating in earnings, which holds immense significance. He said that one of the key opportunities he sees in the market at present is a down market cap. Small caps have not participated in much of the upside of the bull market for the past three years because they haven’t had earnings. However, the market is finally seeing an inflection point. Orton says that the key to these market dynamics is selectivity. You can’t just own the Russell 2000 and expect to outperform. Instead, it would be prudent to focus on the market cap and valuation opportunities.
Other experts are reflecting similar expectations. On February 14, Stacey Sears, Emerald Advisers portfolio manager, appeared on ‘Squawk Box’ to talk about the small-cap stock performance and market trends, among other things. She said that earnings growth in this season is coming ahead of expectations. Small caps have essentially been in an earnings recession over the better part of the last two years. She said that fiscal Q4 2024 was the first quarter they expected earnings to turn positive year-over-year, and the data shows that they are outpacing those expectations. The earnings projections were around 2% growth, but they are tracking the growth of high-single digits. The breadth of the outperformance is also encouraging, as the market is seeing a really nice upside within financials, healthcare, and technology. Revisions ratios are turning positive.
Typically, for small caps, the year starts with positive expectations, which gradually get tamped down as the year progresses. However, this year, the market is seeing the expectations hold in, which is highly encouraging for recovery in an asset class that has lagged for the better part of the last two years.
READ ALSO: 10 Best Drug Stocks to Buy Now and 10 Best Food Stocks To Buy Under $20.
Is the Trump Administration a Tailwind for Small Caps?
Experts believe that the Trump administration may create solid tailwinds for two market groups drastically different from each other: small-cap stocks and big banks. While bank stocks are rallying, VettaFi’s Todd Rosenbluth anticipated that small-cap stocks may be one of the biggest players under Trump’s administration. He said that small-caps are majorly shielded from tariff threats and reshoring. CNBC reported that he voiced the following about the scenario:
“If we have a focus on the U.S. and making America even stronger, then small-cap companies stand to benefit from that because they have less multinational exposure.”
Since small-cap stocks do not have as significant multinational exposure as large or mid-caps, they are less likely to face uncertainty during market volatility.
Our Methodology
We sifted through stock screeners, online rankings, and ETFs to compile a list of 20 stocks with a forward P/E of less than 20 and a market cap between $300 million and $2 billion. We then selected the top 10 stocks that were the most popular among elite hedge funds as of Q3 2024. We sourced the hedge fund sentiment data from Insider Monkey’s database. The list is sorted in ascending order of hedge fund sentiment. Please note that the P/E ratios are as of February 14, 2025.
Why do we care about what hedge funds do? 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 colorful assortment of children’s apparel with different themes, capturing the dynamism of the business.
Carter’s, Inc. (NYSE:CRI)
Market Cap: $1.91 billion
Forward P/E: 9.96
Number of Hedge Fund Holders: 30
Carter’s, Inc. (NYSE:CRI) is all about babies and young kids. It manufactures and sells apparel and related accessories for this age group under its vast portfolio of brands, including Carter’s, OshKoshB’gosh, Precious Firsts, Just One You, Child of Mine, Simple Joys, and Skip Hop.
The company exceeded its fiscal Q3 2024 sales and earnings objectives, as its US retail sales surpassed expectations due to the strength of its product offerings and the effectiveness of its brand marketing strategies and pricing. In July, Carter’s, Inc. (NYSE:CRI) initiated a plan to invest around $40 million in more competitive pricing and $10 million in additional brand marketing. Coupled with better online and in-store shopping experiences, these investments significantly improved the company’s US retail sales. It saw improving trends in unit volume, conversation rates, transactions, and new customer acquisition.
Carter’s, Inc. (NYSE:CRI) holds a competitive market advantage as the largest supplier of young children’s apparel to big brand retailers. It is thus benefiting from consumers preferring one-stop shopping experiences in big brand retailers in this inflationary cycle. Looking forward, the company’s growth strategies are focused on the fundamentals, which include improving the value and style of its product offerings, improving its marketing effectiveness and capabilities, and leveraging its multi-channel market presence to boost the reach of its brands. The strength of its high-margin business model and cash flow generation lend it the resources to invest in its growth strategies. The company ranks third on our list of the 10 most undervalued small-cap stocks to invest in.
Palm Valley Capital Fund stated the following regarding Carter’s, Inc. (NYSE:CRI) in its Q4 2024 investor letter:
“The three positions contributing most negatively to the Fund’s fourth quarter return were the Sprott Physical Silver Trust (ticker: PSLV), ManpowerGroup (ticker: MAN), and Carter’s, Inc. (NYSE:CRI). Carter’s stock declined during the quarter even after posting stronger than expected operating results. While Carter’s retail business showed signs of improvement last quarter, sales remained under pressure. Management believes inflation has reduced young parents’ discretionary income and ability to spend on children’s clothing. Carter’s has responded by lowering prices at its stores, which has turned volumes positive but reduced profit margins. While the company maintained its profit guidance for the year, margins will likely remain below average, given weak consumer spending and higher promotions. We do not expect business conditions to improve in the near term, but we believe Carter’s depressed stock is trading at an attractive discount to our calculated valuation. The shares are priced at 11x 2024 estimated earnings and offer a 5.9% dividend yield.”
Overall, CRI ranks 3rd on our list of the most undervalued small-cap stocks to invest in. While we acknowledge the potential of CRI, 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 CRI but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: 20 Best AI Stocks To Buy Now and Complete List of 59 AI Companies Under $2 Billion in Market Cap
Disclosure: None. This article is originally published at Insider Monkey.
