In this piece, we will take a look at 11 cheap small cap stocks to buy before the next breakout. If you want to skip out on an introduction to small cap stocks and the latest events in the stock market, then take a look at 5 Cheap Small-Cap Stocks to Buy Before the Next Breakout.
Different sectors of the stock market react differently to economic indicators and offer different kinds of returns. Large cap stocks such as Apple Inc. (NASDAQ:AAPL) and Meta Platforms, Inc. (NASDAQ:META) are better suited for times of turmoil as their heft and size weather serious downturns in the market. However, consumer defensive stocks such as Walmart Inc. (NYSE:WMT) outpace the mega cap technology stocks in ‘defending’ against share losses. On the flip side, small cap stocks typically fall significantly if the economic outlook is dour. This is because these firms have relatively smaller markets and are not able to hedge effectively against significant drops in consumer spending. Yet, as the condition improves, what goes down can go up, and small caps can lead their mega cap peers when it comes to returns.
Right now, investors in American stocks are watching the Federal Reserve with eagle eyes. While the central bank has signaled that today’s economic climate is quite different from last year, the fact that the U.S. economy has remained resilient and inflation has taken longer than expected to come down has still left some unease among investors. However, the close of August had some good news for investors. This came in the form of job openings, which measure the state of the labor market – one of the Fed’s most crucially watched metrics for its interest rate decisions.
The Labor Department’s Job Openings and Labor Turnover Survey (JOLTS) showed that job openings in July dropped by 338,000 to 8.83 million which was significantly lower than what economists polled by multiple news media outlets were expecting. For stocks, this is a bullish indicator since it shows that the job market is slowing down. It indicates that firms are hiring less aggressively than before and can reduce the compensation offered to new employees as well for a domino effect towards reducing inflation. The job openings rate further bolsters this conclusion as it dropped by 0.2% to sit at 5.3% for June.
Additionally, workers are also worried about a slowing economy as resignations also slowed down in July. They stood at 3.5 million in July which marked a 29 month low. Markets, which had dropped earlier this month in a wave of speculative selling improved after the JOLTS report. The S&P500 index was up 1.23% at the time of writing, while the NASDAQ 100, the NASDAQ Composite, and the Dow Jones Industrial Average (DJIA) were up by 1.91%, 1.63%, and 0.68%, respectively.
Reaction in the small cap segment was roughly at par with the other indexes as the Russell 2000 and Russell 3000 stock indexes gained 1.28% and 1.20%, respectively. This 0.8% difference in the gains between the two underscores a crucial benefit of investing in small cap stocks as well. The logic in favor of small cap investing states that the smaller the stock, the more it can gain in percentage terms and the Russell 2000’s gains support this point of view since it is made of the 2000 smallest stocks in the Russell 3000 index.
A cautious turnaround in America’s economic outlook also appears to be influencing the optimism about the prospects of small cap investing. At least that’s what analysts at Bank of America Corporation (NYSE:BAC) believe. In a freshly released report, they have selected some top small cap stocks that can benefit from an economic recovery. The list includes firms from the biotechnology, energy, and industrial sectors, with some of the names being Northern Oil and Gas (NOG), Chord Electronics (NASDAQ:CHRD), Merus N.V. (NASDAQ:MRUS), MagnaChip Semiconductor Corporation (NYSE:MX), and Algoma Steel Group Inc. (NASDAQ:ASTL). In fact, interest in the small cap sector has actually started to pique as of late, with a report from July showing that flows in small cap stocks picking up in July and leading Bank of America to comment that a “potential” for a rally was present due to earlier bearish trends.
This sentiment is echoed by Chuck Royce’s Royce Investment Partners which shared in a recent blog post:
Yet we are optimistic both in spite of the relative disadvantage of small-caps and, in some ways, because of it.
First, significant multiple compression has occurred over the last several months among small caps, particularly small-cap value stocks. The result is that valuations looked highly favorable for the Russell 2000, on both an absolute basis and relative to the Russell 1000, where they remain close to a 20-year low, based on our preferred valuation metric, enterprise value over earnings before interest & taxes (“EV/EBIT”). Unsurprisingly in light of how it has recently lagged growth, the Russell 2000 Value Index finished June much more attractively valued than the Russell 2000 Growth Index, based on that same EV/EBIT metric. It is also worth noting that concerns about elevated valuations in the overall market have played out in an inflationary climate with rising interest rates and widespread anxiety that the economy is about to slip into a recession. We suspect that these concerns will continue to recede as economic news continues to skew more positively. Of course, we are more focused on the absolute valuations of individual companies, which in many instances look appealingly inexpensive to us. The average stock in the Russell 2000 was -28% off its 52-week high at the end of June, which gives some sense of the opportunity set that exists within small cap—and with it, the potential for improved performance going forward. Our expectation is that this potential will be realized over the next few years.
For some of Royce Investment’s stock picks during the first quarter, you can check out Chuck Royce Portfolio, Performance and Net Worth.
With these details in mind, we decided to take a look at some small cap stocks to buy before a potential breakout out of which some top picks are uniQure N.V. (NASDAQ:QURE), Aclaris Therapeutics, Inc. (NASDAQ:ACRS), and AbCellera Biologics Inc. (NASDAQ:ABCL).
Our Methodology
To compile our list of the cheap small cap stocks to buy before a breakout we made a list of firms whose shares trade below $10 and with analyst recommendations of Buy or better. To account for a potential breakout, only those stocks with the highest share price upside based on analyst average price targets were selected. The list was then further refined to account for hedge fund sentiment, as the stocks with the stocks with highest hedge fund number of hedge fund investors during this year’s second quarter were selected for the final collection
11 Cheap Small-Cap Stocks to Buy Before the Next Breakout
11. Repare Therapeutics Inc. (NASDAQ:RPTX)
Number of Hedge Fund Investors In Q2 2023: 14
Latest Share Price: $9.81
Repare Therapeutics Inc. (NASDAQ:RPTX) is a Canadian biotechnology firm that develops cancer treatments using gene editing technologies. The firm’s average analyst share price target sits at $27, for a sizeable upside over the current share price. Its second quarter earnings report saw the company beat analyst EPS estimates, and a proof of concept trial for a tumor treatment also demonstrated favorable results in June.
For the quarter ending in June 2023, 14 out of the 910 hedge funds profiled by Insider Monkey had held a stake in Repare Therapeutics Inc. (NASDAQ:RPTX). Out of these, the firm’s biggest investor is Mark Lampert’s Biotechnology Value Fund / BVF Inc since it owns 8.2 million shares that are worth $87.7 million.
10. Aadi Bioscience, Inc. (NASDAQ:AADI)
Number of Hedge Fund Investors In Q2 2023: 14
Latest Share Price: $6.76
Aadi Bioscience, Inc. (NASDAQ:AADI) is another biotechnology company developing cancer treatments. The stock is rated Strong Buy on average and the average share price target is $35. Aadi Bioscience, Inc. (NASDAQ:AADI)’s second quarter results saw it report $6.2 million in revenue for a substantial growth over the year ago quarter’s $3.4 million.
During this year’s second quarter, 14 out of the 910 hedge funds researched by Insider Monkey had invested in Aadi Bioscience, Inc. (NASDAQ:AADI). Along with uniQure N.V. (NASDAQ:QURE), Aclaris Therapeutics, Inc. (NASDAQ:ACRS), and AbCellera Biologics Inc. (NASDAQ:ABCL) it is a small cap stock that might be worth buying before the next breakout.
9. The Joint Corp. (NASDAQ:JYNT)
Number of Hedge Fund Investors In Q2 2023: 16
Latest Share Price: $9.61
The Joint Corp. (NASDAQ:JYNT) is a chiropractic services provider with hundreds of clinics all over America. Its average analyst share price target is $31. However, the shares dipped in August after the firm delayed the filing of its second quarter results despite marking strong revenue growth.
Insider Monkey’s June quarter of 2023 survey of 910 hedge funds revealed 16 The Joint Corp. (NASDAQ:JYNT) investors. The firm’s largest hedge fund shareholder is Gregory Bylinsky and Jefferson Gramm’s Bandera Partners due to its $35.7 million stake.
8. Arcutis Biotherapeutics, Inc. (NASDAQ:ARQT)
Number of Hedge Fund Investors In Q2 2023: 17
Latest Share Price: $8.89
Arcutis Biotherapeutics, Inc. (NASDAQ:ARQT) is a biotechnology firm that develops treatments for skin diseases. It’s another stock that is rated Strong Buy on average and the average share price target is a whopping $41.88.
Insider Monkey’s Q2 2023 research of 910 hedge fund holdings outlined that 17 had bought a stake in the company. Arcutis Biotherapeutics, Inc. (NASDAQ:ARQT)’s biggest stakeholder is David Rosen’s Rubric Capital Management since it owns $46 million worth of shares.
7. Nurix Therapeutics, Inc. (NASDAQ:NRIX)
Number of Hedge Fund Investors In Q2 2023: 18
Latest Share Price: $8.59
Nurix Therapeutics, Inc. (NASDAQ:NRIX) is an American firm making treatments for lymphoma, tumors, and other cancers. Despite a worrying cash burn rate, the firm’s revenue is actually growing, with the second quarter results showing $30.7 million in net sales which more than doubled over the year ago quarter’s $11 million.
After scouring through 910 hedge funds for their second quarter of 2023 shareholdings, Insider Monkey discovered that 18 had invested in Nurix Therapeutics, Inc. (NASDAQ:NRIX). Julian Baker and Felix Baker’s Baker Bros. Advisors is the company’s largest stakeholder, owning 3.8 million shares that are worth $38.7 million.
6. Edgewise Therapeutics, Inc. (NASDAQ:EWTX)
Number of Hedge Fund Investors In Q2 2023: 19
Latest Share Price: $7.00
Edgewise Therapeutics, Inc. (NASDAQ:EWTX) focuses its efforts on developing treatments for diseases of the heart and the muscular system. While the shares currently trade for $7, analysts have penned in a massive upside through an average share price target of $27.
19 out of the 910 hedge funds part of Insider Monkey’s Q2 2023 database have bought the firm’s shares. Edgewise Therapeutics, Inc. (NASDAQ:EWTX)’s biggest investor is Samuel Isaly’s OrbiMed Advisors since it owns a stake worth $112 million.
uniQure N.V. (NASDAQ:QURE), Edgewise Therapeutics, Inc. (NASDAQ:EWTX), Aclaris Therapeutics, Inc. (NASDAQ:ACRS), and AbCellera Biologics Inc. (NASDAQ:ABCL) are some cheap small cap stocks with positive indicators.
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Disclosure: None. 11 Cheap Small-Cap Stocks to Buy Before the Next Breakout is originally published on Insider Monkey.