In this article, we will take a look at the 14 small-cap stocks with high potential.
Small-cap investors took a beating in 2022 as data shows that small-cap stocks are near their all-time lows. According to data from Royce Investment Partners, as of the end of December 2022, small-cap valuations remained near their lowest levels in 20 years compared to large-cap valuations. This, however, presents an attractive opportunity for small-cap investors who have the stomach to take risks and wait for the market to turn the corner. Data shows that small-cap stocks tend to do better than large-cap stocks over the long term. According to a 2019 report from investment firm UBS, the MSCI ACWI Small Cap index outperformed the MSCI ACWI by 2.4% per annum over 20 years. The report said that small-cap stocks offer investors with a “broader universe with higher active share” and increase the chances of better active returns. The UBS report also said that small-cap stocks trade at a lower price/book (P/B) ratio than large cap stocks, which creates an attractive entry point for investors.
The UBS report also said that the “size effect” in the stocks markets of the US and Europe have prevented small-caps from getting a lot of investor attention over the past few decades. Major investment firms and portfolio analysis services do not invest a lot of resources on small-cap stock research. This creates an opportunity for investors who want to find small companies with large potential.
The UBS report also said small companies provide a better opportunity for investors because they often operate in niche markets with simplified, lean business models.
Photo by Chris Liverani on Unsplash
Our Methodology
Our methodology for this article was simple and straightforward. We scanned Insider Monkey’s database of 920 elite hedge funds and picked the top (ones with highest number of hedge funds having stakes in them as of the end of the third quarter) 14 stocks with market caps less than $1 billion as of January 16. We have briefly discussed analyst ratings and growth catalysts of these stocks where applicable to give you an idea of the factors that define the potential of these stocks.
Small-Cap Stocks with High Potential
14. Cogent Biosciences, Inc. (NASDAQ:COGT)
Number of hedge funds: 29
Cogent Biosciences, Inc. (NASDAQ:COGT) is one of the best small-cap stocks with high potential. The Massachusetts-based company makes precision therapies to treat patients with unmet medical needs. In December, investment firm Needham started covering Cogent Biosciences, Inc. (NASDAQ:COGT) with a Buy rating, saying Cogent Biosciences, Inc. (NASDAQ:COGT)’s mastocytosis candidate bezuclastinib can outperform a rival therapy from Blueprint Medicines (BPMC).
The investment firm’s analyst estimate $1.2 billion in sales for bezuclastinib in 2030.
For the third quarter, Cogent Biosciences, Inc. (NASDAQ:COGT) posted GAAP EPS of -$0.50, beating estimates by $0.01. As of the end of the third quarter, Cogent Biosciences, Inc. (NASDAQ:COGT) had cash, cash equivalents and marketable securities of $289.1 million. Cogent Biosciences, Inc. (NASDAQ:COGT) said this was enough to fund its operations until 2025.
13. Enhabit, Inc. (NYSE:EHAB)
Number of hedge funds: 29
Healthcare services company Enhabit, Inc. (NYSE:EHAB) provides home health and hospice care. Enhabit, Inc. (NYSE:EHAB) saw a huge spike in hedge fund sentiment in the third quarter of 2022, as per Insider Monkey’s proprietary database of 920 elite hedge funds. 29 funds ended the quarter with Enhabit, Inc. (NYSE:EHAB) in their portfolios, compared to 3 funds in the previous quarter.
In the third quarter, legendary value investor Seth Klarman initiated fresh stakes in Enhabit, Inc. (NYSE:EHAB).
In October, Enhabit, Inc. (NYSE:EHAB) acquired Caring Hearts Hospice, a hospice agency based in Texas.
12. SomaLogic, Inc. (NASDAQ:SLGC)
Number of hedge funds: 29
Colorado-based SomaLogic, Inc. (NASDAQ:SLGC) makes protein biomarker discovery and clinical diagnostics solutions. Earlier this month, SomaLogic, Inc. (NASDAQ:SLGC) stock soared after the company said it expects 2022 preliminary revenue to be at the high end of its forecast of $93 million to $98 million. SomaLogic, Inc. (NASDAQ:SLGC) also announced that it has signed an agreement with Group 42 Healthcare. Group 42 will use SomaLogic as its sole proteomics provider.
A total of 29 hedge funds tracked by Insider Monkey had stakes in SomaLogic, Inc. (NASDAQ:SLGC) as of the end of the third quarter. The total value of these stakes was $145 million.
11. Health Catalyst, Inc. (NASDAQ:HCAT)
Number of hedge funds: 29
Health Catalyst, Inc. (NASDAQ:HCAT) data and analytics company Health Catalyst, Inc. (NASDAQ:HCAT) ranks 11th in our list of small-cap stocks with high potential. In November Health Catalyst, Inc. (NASDAQ:HCAT) jumped as much as 23% after Health Catalyst, Inc. (NASDAQ:HCAT) beat Q3 estimates and posted upbeat FY22 outlook. Revenue in the third quarter jumped over 10% to a total $68.35 million. Technology revenue increased by 15% in the period to come in at $44 million.
As of the end of the third quarter, 29 hedge funds reported having stakes in Health Catalyst, Inc. (NASDAQ:HCAT).
10. Landcadia Holdings IV, Inc. (NASDAQ:LCA)
Number of hedge funds: 30
Landcadia Holdings IV, Inc. (NASDAQ:LCA) is one of the most famous SPACs among the elite hedge funds tracked by Insider Monkey. Landcadia Holdings IV, Inc. (NASDAQ:LCA) intends to effect a merger, capital stock exchange, asset acquisition or similar deals in hospitality, gaming, dining and entertainment industries.
A total of 30 hedge funds tracked by Insider Monkey had stakes in Landcadia Holdings IV, Inc. (NASDAQ:LCA) as of the end of the third quarter, according to Insider Monkey’s database of 920 elite funds.
9. Vimeo, Inc. (NASDAQ:VMEO)
Number of hedge funds: 30
Video platform Vimeo, Inc. (NASDAQ:VMEO) has lost about 70% in value over the past one year. However, the small-cap stock continues to remain popular among elite hedge funds and market analysts.
Earlier this month, Vimeo, Inc. (NASDAQ:VMEO) joined the ever-growing list of tech companies that announced layoffs. Vimeo, Inc. (NASDAQ:VMEO) said it was planning to cut about 11% of its global workforce to “become sustainably profitable”. Vimeo, Inc. (NASDAQ:VMEO)’s management said that nearly every department will see job cuts.
A total of 30 hedge funds tracked by Insider Monkey had stakes in Vimeo, Inc. (NASDAQ:VMEO) as of the end of the third quarter, compared to 26 funds in the previous quarter. The total value of these stakes was $138 million.
8. Merus N.V. (NASDAQ:MRUS)
Number of hedge funds: 31
Elite hedge funds love this Netherlands-based clinical-stage immuno-oncology company. Merus N.V. (NASDAQ:MRUS) is known for Zenocutuzumab (MCLA-128), which is in a phase 2 clinical trials for the treatment of patients with metastatic breast cancer. However, in November, Merus N.V. (NASDAQ:MRUS) fell about 30% after FDA said Merus N.V. (NASDAQ:MRUS) needs additional patient enrollment to generate data to support a potential marketing application for bispecific antibody Zenocutuzumab.
As of the end of the third quarter, 31 hedge funds tracked by Insider Monkey reported having stakes in Merus N.V. (NASDAQ:MRUS). The total value of these stakes was $346 million. The biggest stakeholder of Merus N.V. (NASDAQ:MRUS) was Mark Lampert’s Biotechnology Value Fund / BVF Inc, which had a $69 million stake in Merus N.V. (NASDAQ:MRUS) at the end of September.
7. Altimmune, Inc. (NASDAQ:ALT)
Number of hedge funds: 31
Another biotech company on our list, Altimmune, Inc. (NASDAQ:ALT) is focusing on the prevention and treatment of infectious diseases. It ranks 7th in our list of the small-cap stocks with high potential. Altimmune, Inc. (NASDAQ:ALT) has already gained about 120% over the past one year. As of the end of the third quarter, 31 hedge funds tracked by Insider Monkey reported having stakes in Altimmune, Inc. (NASDAQ:ALT), compared to 27 funds in the previous quarter. The total value of these stakes was $291 million.
In December, Altimmune, Inc. (NASDAQ:ALT) jumped after its drug to treat Non-Alcoholic Fatty Liver Disease (NAFLD) met primary endpoint. The phase 1b trial showed greater than 75% relative reduction in liver fat content at 1.8 mg and 2.4 mg doses at 24 weeks.
Last year, Goldman Sachs also talked about Altimmune, Inc. (NASDAQ:ALT) on a bullish note, saying that Altimmune, Inc. (NASDAQ:ALT) provides an attractive opportunity in the weight loss and obesity space.
6. Independence Holdings Corp. (NASDAQ:ACQR)
Number of hedge funds: 31
Another SPAC in our list, New York-based Independence Holdings Corp. (NASDAQ:ACQR) intends to effect a merger, capital stock exchange, asset acquisition, stock purchase, reorganization, or related business combination with one or more businesses or entities.
31 of the 920 hedge funds tracked by Insider Monkey entered the last quarter of 2022 with Independence Holdings Corp. (NASDAQ:ACQR) in their portfolios.
Ken Griffin’s Citadel Investment Group, Paul Glazer’s Glazer Capital and Israel Englander’s Millennium Management had the biggest stakes in Independence Holdings Corp. (NASDAQ:ACQR) as of the end of the September quarter.
5. Magnachip Semiconductor Corporation (NSYE:MX)
Number of hedge funds: 31
Magnachip Semiconductor Corporation (NSYE:MX) is one of the best small-cap stocks to buy with high potential. Magnachip Semiconductor Corporation (NSYE:MX) sells analog and mixed-signal semiconductor platform solutions in high-growth markets like IoT, automotive, consumer and industrial. Magnachip bulls believe Magnachip Semiconductor Corporation (NSYE:MX) has some strong growth catalysts. Its EPS estimate for 2022 was positive and analysts believe its EPS in 2023 will also remain in the green territory despite several headwinds. Magnachip Semiconductor Corporation (NSYE:MX)’s revenue took a hit in the second half of the year amid a slump in demand due to supply chain issues and lockdowns in China. With the Chinese economy turning back to normal, analysts believe the company could see normality in its operations.
During the third quarter, Magnachip Semiconductor Corporation (NSYE:MX)’s adjusted EPS came in at $0.02, beating estimates by $0.08. For the fourth quarter, Magnachip Semiconductor Corporation (NSYE:MX) said it expects revenue to come in between $57 million to $62 million, versus the consensus estimate of $78.77 million.
Here is what Altron Capital Management has to say about Magnachip Semiconductor Corporation (NYSE:MX) in its Q4 2021 investor letter:
“MagnaChip Semiconductor Corp. (NYSE:MX). While the previous buyout offer from Wise Road Capital did not go through as many expected, the company is still in talks with other potential buyers. Furthermore, the company announced a USD 75 million share buyback, which represents a significant percentage of the company’s shares. While we do not generally enter positions with the anticipation of a buyout, it is the case that a MagnaChip acquisition will be the most likely outcome.”
4. DiamondHead Holdings Corp. (NASDAQ:DHHC)
Number of hedge funds: 33
DiamondHead Holdings Corp. (NASDAQ:DHHC) is another SPAC in our list. DiamondHead Holdings Corp. (NASDAQ:DHHC) intends to effect a merger, capital stock exchange, asset acquisition, stock purchase, reorganization, or related business combination with one or more businesses. A total of 33 hedge funds tracked by Insider Monkey had stakes in DiamondHead Holdings Corp. (NASDAQ:DHHC), compared to 34 funds in the previous quarter. Several major hedge funds have stakes in DiamondHead Holdings Corp. (NASDAQ:DHHC). These include Israel Englander’s Millennium Management, Ken Griffin’s Citadel Investment Group and Robert Henry Lynch’s Aristeia Capital.
3. Clear Channel Outdoor Holdings, Inc. (NYSE:CCO)
Number of hedge funds: 33
Texas-based Clear Channel Outdoor Holdings, Inc. (NYSE:CCO) sells advertising services via billboards, kiosks, advertising services, electronic screens and wallscape displays. As of the end of the third quarter of 2022, 33 hedge funds tracked by Insider Monkey reported having stakes in Clear Channel Outdoor Holdings, Inc. (NYSE:CCO), compared to 32 funds in the previous quarter. During the third quarter, Clear Channel Outdoor Holdings, Inc. (NYSE:CCO)’s net loss came in at $38.8 million. Revenue in the quarter jumped 1.1% to reach $602.91 million, missing analyst estimates by $0.76 million. Clear Channel Outdoor Holdings, Inc. (NYSE:CCO)’s management said that Clear Channel’s business “remains healthy” as advertisers are continuing to tap the out of home market.
2. CONX Corp. (NASDAQ:CONX)
Number of hedge funds: 36
CONX Corp. (NASDAQ:CONX) is a SPAC focusing on effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar deals in technology, media, and telecommunications industries. It is one of the favorites of elite hedge funds. 36 funds in the database of Insider Monkey ended the third quarter with CONX Corp. (NASDAQ:CONX) in their portfolios, compared to 38 funds in the previous quarter. In October, the SPAC, headed by DISH Network (NASDAQ:DISH) Chairman Charles Ergen was reported to be in talks to buy DISH’s retail wireless unit, Boost Mobile.
1. Algoma Steel Group Inc. (NASDAQ:ASTL)
Number of hedge funds: 39
Algoma Steel Group Inc. is one of the most popular small-cap stocks among the 920 hedge funds tracked by Insider Monkey as of the end of the third quarter. Despite being a small company, 39 funds had stakes in Algoma Steel Group Inc. (NASDAQ:ASTL) at the end of the September quarter, compared to 45 funds in the previous quarter. Earlier this month, Algoma Steel Group Inc. (NASDAQ:ASTL) posted an update for the third quarter. Algoma Steel Group Inc. (NASDAQ:ASTL) said it expects its adjusted EBITDA loss in the period to come in between C$35 million to C$45 million. Algoma Steel Group Inc. (NASDAQ:ASTL) said that the sequential decrease in steel shipments was primarily due to lower than expected plate shipments, decline in steel prices and seasonable maintenance activities due to winter.
Here is what Nordstern Capital has to say about Algoma Steel Group Inc. (NASDAQ:ASTL) in its Q3 2022 investor letter:
“The world is short on raw materials and energy. Nordstern Capital has increased its exposure to raw materials and energy. Recession fears may temporarily suppress demand and prices. The fundamental issue, however, is a sustainable lack of supply, caused by decade-long underinvestment. The shortages cannot be resolved in the short to medium term.
Currently suppressed stock prices offer a wonderful opportunity for our commodity businesses to buy back their own shares. For instance, Algoma Steel Group (NASDAQ:ASTL) reduced its diluted share count this year from 177 million to 111 million. Nonetheless, ASTL’s share price has come down 50%, because US HRC steel prices per ton declined in the past year from $2,000 to currently $713. Today, ASTL has $500m in net cash and a market capitalization of about $700m. The company is profitable even in the current recessionary environment. The CFO expects annual mid-cycle free cash flow generation greater than the current ASTL enterprise value. This is one illustrative example. ASTL is not alone. Many present-day commodity businesses are cash and earnings rich and can use weak stock prices for aggressive buybacks.”
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Disclosure: None. 14 Small-Cap Stocks with High Potential is originally published on Insider Monkey.
