The Russell 2000, a benchmark index for small-cap stocks, has historically lagged behind the large-cap S&P 500. Over the past decade, the S&P 500 has delivered returns of 200.8%, nearly double the 103.2% return of the Russell 2000. Even in 2024, the S&P 500 outpaced small caps, returning 27.1% compared to the Russell 2000’s 16.1%. However, a shift may already be underway. Since the U.S. presidential election on November 5, the Russell 2000 has nearly matched the S&P 500’s returns, signaling a possible resurgence in small-cap performance. Analysts at CFRA forecast that the S&P SmallCap 600 Index will generate EPS growth of 20.9% in 2025 and 18.6% in 2026, a sharp contrast to the negative 8% EPS growth seen in 2024.

The economic and political landscape also seems to favor small caps. Historically, small-cap stocks have performed best when the economy emerges from a slowdown, credit spreads tighten, and investor risk appetite improves. Donald Trump’s return to the presidency has further buoyed optimism. Trump’s policies emphasize domestic economic growth, which directly benefits small-cap companies, as nearly 80% of Russell 2000 revenue comes from domestic operations. Additionally, the National Federation of Independent Business (NFIB) Small Business Optimism Index recently jumped above its 50-year average for the first time in three years following Trump’s election victory. This surge in optimism indicates renewed confidence among small business owners, a critical driver for small-cap growth.

Expert Explains Why Small and Mid-Cap Stocks Are Undervalued Gems

In an interview with CNBC on November 4, Charlotte Daughtrey, Equity Investment Specialist at Federated Hermes, discussed the current investment landscape, particularly focusing on the small and mid-cap market. She highlighted that these segments are currently trading at or below their long-term averages, offering a 25% discount compared to large caps. Typically, small and mid-cap stocks should command a 10% premium due to their higher growth potential, but the ongoing risk environment, exacerbated by the pandemic and the prolonged period of higher interest rates, has led to their devaluation and for active investors this presents a significant opportunity.

Daughtrey noted that the small and mid-cap space is particularly attractive due to its potential for mergers and acquisitions (M&A) activity. She explained that well-performing, niche-focused companies in this segment are often attractive targets for larger corporations seeking to acquire growth rather than investing heavily in research and development. This dynamic is particularly evident in the U.S., known for its innovative companies, and is a key reason why Federated Hermes is overweight in information technology. This sector not only offers growth but also benefits from the AI tailwind without being as crowded as some larger-cap technology stocks.

Daughtrey emphasized that small and mid-cap stocks are likely to perform well compared to large-cap companies if there is a strong economy in the United States because small and mid-cap companies are more domestically focused, with 70-80% of their revenues generated domestically compared to 50-50 for large caps.

The current economic and political landscape presents a compelling case for investing in small and mid-cap technology stocks. With that in context, let’s take a look at the 12 best technology penny stocks to buy according to hedge funds.

Our Methodology

To compile our list of the 12 best technology penny stocks to buy according to hedge funds, we used Finviz and Yahoo stock screeners to find the 30 largest technology companies trading below the price of $5, as of December 23. Then we used Insider Monkey’s Hedge Fund database to rank 12 stocks according to the largest number of hedge fund holders, as of Q3 2024. The list is sorted in ascending order of hedge fund sentiment.

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).

12 Best Technology Penny Stocks To Buy According to Hedge Funds

12. Nokia Oyj (NYSE:NOK)

Number of Hedge Fund Investors: 16

Stock Price as of December 23: $4.43

Nokia Oyj (NYSE:NOK), once a market leader in the hardware market, is a global telecommunications and networking solutions company with a presence in over 130 countries. The company offers a wide range of products and services, including network infrastructure, software, and services for communication service providers (CSPs), as well as technology licensing and IoT solutions.

Nokia Oyj (NYSE:NOK) is actively diversifying its business to tap into high-growth non-CSP markets, such as data centers, defense, and private wireless. The company has secured key references with companies such as Apple and Microsoft and recently signed a deal with CoreWeave, a leading GPU-as-a-service company. The company is also investing in expanding its product portfolio to better serve these markets, including the launch of its Event-Driven Automation (EDA) platform, which automates the entire data center network lifecycle. In the Cloud and Network Services (CNS) segment, Nokia Oyj (NYSE:NOK) is leveraging its leadership in 5G Core networks for cloud-native transformation. The company has supported key deployments on public clouds, including AWS, O2 Telefonica, Comcast, and Telenet.

In Fixed Networks,  Nokia Oyj (NYSE:NOK) is exploring new opportunities in fixed wireless and Optical LAN, where enterprise customers can use passive optical equipment for in-building networks. In Optical Networks, Nokia Oyj (NYSE:NOK) is positioned for future growth with its PSE-6s technology and the pending acquisition of Infinera, which will significantly increase the company’s scale in North America and exposure to webscale customers.

11. E2open Parent Holdings, Inc. (NYSE:ETWO)

Number of Hedge Fund Investors: 16

Stock Price as of December 23: $2.63

E2open Parent Holdings, Inc. (NYSE:ETWO) is a leading provider of cloud-based, end-to-end supply chain management software. The company offers solutions for planning, procurement, manufacturing, logistics, and global trade management, helping enterprises streamline complex supply chain operations. E2open Parent Holdings, Inc. (NYSE:ETWO) serves a variety of industries, including retail, consumer goods, pharmaceuticals, and manufacturing. Its major clients include global brands such as Dell, HP, and Unilever. The company generates revenue primarily through subscription fees for its software services.

E2open Parent Holdings, Inc. (NYSE:ETWO) is focusing on software development and AI-based innovations. The company recently announced a set of new products and solutions, including enhancements in areas such as connected planning, business risk management, and global trade. These innovations are designed to help clients navigate the complexities and risks of the global business environment more efficiently and effectively. The company’s focus on embedded AI and its ability to transform unstructured information into actionable insights was well-received by attendees at the recent Connect 2024 conference.

E2open Parent Holdings, Inc.’s (NYSE:ETWO) management has implemented a comprehensive growth plan that emphasizes client satisfaction, flawless solution delivery, and maximum value realization. The company’s strategic focus is on building long-term partnerships with its clients, ensuring that they receive measurable business value from the company’s solutions and innovations.

E2open Parent Holdings, Inc. (NYSE:ETWO) is also working to improve sales productivity and accelerate pipeline growth. This involves enhancing the sales team’s ability to identify, engage, and convert prospects through a more client-centric and value-focused approach. The company is also investing in training and upskilling its sales and product teams to drive higher sales.