In this article, we will look at the 10 Best Small-Cap Stocks Ready To Explode.
Prospects For Extended Outperformance Of Small-Cap Stocks
On October 7, Chuck Royce, founder and Senior Advisor, and Francis Gannon, Co-Chief Investment Officer and Managing Director of Royce Investment, discussed the outperformance of small-cap stocks. While discussing the reasons that led to the Russell 2000 Index doing well in Q3 ’24, Gannon noted that the strong performance of the Russell 2000 Index, which was up 9.3%, in the third quarter of 2024 can be attributed to a “quintessential reversion to the mean,” as small-caps had lagged behind larger companies for an extended period. He thinks that the rebound was not surprising given the historical trends, as the small-cap index outperformed the large-cap Russell 1000, up 6.1%, and the mega-cap Russell Top 50, up 4.2% during this time.
Read Also: 7 Best Nano Cap Stocks To Invest In and 10 High Growth Non-Tech Stocks That Are Profitable in 2024.
On the other hand, Royce mentioned that he was surprised by the concentration of the small-cap gains. He noted that all the gains for the quarter were compressed at the start, as by early July 16, the index had already achieved a 10.6% increase from the end of June, marking its high for the quarter. Royce further mentioned that this rapid ascent was followed by a notable decline, with the index dropping 10.1% from July 16 to August 7 before recovering most of its losses by the end of September. Despite this volatility, he expressed satisfaction with the small-cap performance overall for the quarter, especially since it marked a reversal after small-caps last outperformed large-caps in Q4 2023.
Building further upon the volatility of small-cap stocks, Royce expressed that while volatility in small-cap stocks can be concerning, it is a normal part of investing in this asset class. He emphasized that they welcome volatility as it allows them to take advantage of price fluctuations for long-term gains. Historically, significant intra-year declines are common for small-caps, with the Russell 2000 experiencing double-digit pullbacks in 22 out of the last 25 years.
While answering how the sector can sustain its market leadership performance, Gannon highlighted that market breadth among large caps often leads to better performance for small caps. He pointed out that when the equal-weighted Russell 1000 outperformed its capitalization-weighted counterpart, small-caps typically led in performance. This trend suggests that an expansion of returns across different sectors is a positive indicator for small-cap stocks.
Moreover, both Royce and Gannon stressed that earnings growth is crucial for the long-term success of small-cap stocks. Gannon stated that while short-term market psychology can influence stock prices, consistent earnings are fundamental for sustaining long-term performance. He noted that despite a significant portion of small-cap companies lacking earnings, around 44.6%, those with earnings are expected to grow faster than their large-cap counterparts in 2025.
With that let’s take a look at the 10 best small-cap stocks ready to explode.
A close-up of a computer screen with a graph of the CRSP US Small Cap Value Index.
Our Methodology
To curate the list of 10 best small-cap stocks ready to explode we used the Finviz stock screener and CNN. Using the screener we shortlisted small-cap stocks (market-cap between $500 million to $2 billion) for which analysts are expecting more than 50% upside from the current stock price. Once we had shortlisted the stocks we cross-checked the analysts’ upside potential from CNN. Lastly, we ranked the stocks based on the ascending order of the analyst upside potential. Please note that the data was recorded on November 15, 2024.
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).
10 Best Small-Cap Stocks Ready To Explode
10. Garrett Motion Inc. (NASDAQ:GTX)
Analyst Upside Potential: 52.87%
Garrett Motion Inc. (NASDAQ:GTX) is an automotive technology company based in Switzerland specializing in turbocharging and electric boosting technologies for vehicles. The company designs and manufactures turbochargers, which are devices that increase the power output of engines by forcing more air into the combustion chamber. They produce turbochargers for various types of engines, including those powered by gasoline, diesel, natural gas, and even hybrid or fuel cell systems.
In addition, the company also develops electric boosting technologies that enhance engine performance, particularly in electric and hybrid vehicles. This includes products like electric compressors and e-turbos that help improve efficiency and reduce emissions. Garrett Motion Inc. (NASDAQ:GTX) serves original equipment manufacturers (OEMs) and generates about 86% of its revenue from OEMs, while the other 14% of its revenue comes from the supply of aftermarket parts for vehicle repairs and upgrades. The company has a significant global footprint, with a network that spans over 165 countries.
Garrett Motion Inc. (NASDAQ:GTX) is making strides in both its turbocharger portfolio and electrified solutions. During its third-quarter conference call for fiscal 2024, the company announced that it had secured new contracts for its largest turbocharger, specifically designed for marine and auxiliary power applications, with production expected to commence in 2026.
Financially speaking, the fiscal third quarter of 2024 was a tough quarter for the company as net sales fell 14% year-over-year to $826 million. The decline was due to softness in Europe and China, topped with competitive pressure on global OEMs.
Alluvial Capital Management stated the following regarding Garrett Motion Inc. (NASDAQ:GTX) in its first quarter 2024 investor letter:
“Garrett Motion Inc. (NASDAQ:GTX) delivered nice results in February. The company issued strong guidance for 2024 and best of all, indicated it would use nearly all its 2024 free cash flow to repurchase stock. The company wasted no time, buying back a whopping 10 million shares for $90 million on March 6. Garrett will continue to harvest the cash flows from its dominant turbochargers business, investing in creating products for electric vehicles and returning excess cash to shareholders. Investors seem to be waking up to the reality that while electric vehicles are a near-inevitability, it will be a long time still before internal combustion engines lose their relevance. By the time they do, Garrett Motion will have completed the transition to an electric vehicle equipment manufacturer and will have returned billions in capital to investors.”
9. Arcos Dorados Holdings Inc. (NYSE:ARCO)
Analyst Upside Potential: 53.41%
Arcos Dorados Holdings Inc. (NYSE:ARCO) is the largest independent franchisee of McDonald’s in the world, primarily operating in Latin America and the Caribbean. The company has the exclusive rights to own, operate, and franchise McDonald’s restaurants in 20 countries across Latin America and the Caribbean, including major markets like Brazil, Mexico, and Argentina. It manages over 2,140 McDonald’s locations and employs more than 100,000 people.
During the fiscal third quarter of 2024, Arcos Dorados Holdings Inc. (NYSE:ARCO) demonstrated strong performance, showcasing the resilience of its business model despite economic challenges. The company achieved a new record high revenue for the third quarter which amounted to $1.1 billion and was up 39% year-over-year in constant currency. The increased revenue was due to a 32.1% rise in system-wide comparable sales, with positive contributions from both average check and guest volumes.
Arcos Dorados Holdings Inc. (NYSE:ARCO) has implemented a 3D policy that translates to focusing on Digital, Delivery, and Drive-thru. As a result of this policy, the company was able to increase its sales from digital channels by 16% year-over-year. Digital sales now account for 58% of total systemwide sales, reflecting a strong customer preference for online ordering and mobile app functionalities.
It is one of the best small-cap stocks ready to explode. Analysts’ 12-month median price target for the stock presents a 53% upside from current levels.
Hedge Fund Resource Center