In this article, we look at the 7 cheap small-cap stocks to buy now. We also discuss the latest Federal Reserve actions and their effects on small-cap stocks.
At the September Fed meeting, the Federal Open Market Committee (FOMC) decided to lower its policy interest rate by 50 basis points to support the economy. Chairman Jerome Powell stated that this move is aimed at maintaining labor market strength while reducing inflation.
He also noted that future rate adjustments will depend on incoming economic data. The Fed’s economic projections indicate a federal funds rate of 4.4% by year-end, with further rate cuts expected as inflation falls and unemployment edges up slightly.
The market seems quite happy with the current cut cycle and expects more to come. According to CME’s Fed-watch tool, the market is expecting another 25 to 50 bps cut at the November meeting. As of September 27, 53.3% interest rate traders expect a 50 bps cut while the rest are anticipating a 25 bps cut.
While the market had gotten used to the high rates and was still thriving, the lower fed funds rates have given a much-needed boost as the broader market reached new highs.
Fed Easing Cycle Boosts Optimism for Small Cap Stocks
Greg Tuorto, a portfolio manager at Goldman Sachs Asset Management, recently joined Catalysts on Yahoo Finance and discussed the outlook for small-cap stocks in light of recent Federal Reserve rate cuts and broader economic conditions.
He highlighted several supportive factors for small caps, including a stable U.S. economy and opportunities in sectors like technology, healthcare, and consumer industries. Despite recent underperformance, he believes small caps are positioned for a rebound, driven by strong earnings growth rather than multiple expansions.
Tuorto also emphasized the potential for small caps to outperform large caps in 2025, given that their earnings outlook appears more favorable. He sees the ongoing Fed easing cycle as a tailwind and suggests that businesses have adapted well to the higher rate environment and could benefit significantly from any further rate cuts. While Tuorto isn’t focused on the exact number of cuts, he sees the broader trajectory as a positive catalyst.
The portfolio manager is especially bullish on software stocks and noted that lower rates make this sector more attractive, and he expects more IPO activity in the space in the coming months. For the future, Greg Tuorto also believes that there will be another cut probably in the near future.
With that, we look at the 7 Cheap Small-Cap Stocks To Buy Now.
7 Cheap Small-Cap Stocks To Buy Now
Our Methodology
For this article, we used the Finviz stock screener to identify nearly 150 small-cap stocks with positive forward price-to-earnings ratios. Our definition for small-cap stocks was stocks between $1 billion to $10 billion. Next, we narrowed our list to stocks whose earnings are expected to grow this year according to analysts, compared to the prior year, and have forward PE ratios below 15. Finally, we chose 7 stocks that were most widely held by institutional investors. The 7 cheap small-cap stocks to buy are listed in ascending order of their hedge fund sentiment, as of Q2 2024.
Why are we interested in the stocks that hedge funds pile into? 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).
7 Cheap Small-Cap Stocks To Buy Now
7. Celestica Inc. (NYSE:CLS)
PE Ratio (FWD): 14.02
Number of Hedge Fund Holders: 38
Celestica Inc. (NYSE:CLS) is a Canadian company that specializes in high-reliability design, manufacturing, and supply chain solutions. It provides a variety of services, including design and engineering, manufacturing, logistics, aftermarket services, precision machining, and supply chain management.
Its product offerings focus on hardware platform solutions for diverse sectors such as aerospace and defense, communications, health technology, industrial and smart energy, capital equipment, and consumer robotics.
The company is also making strides in its AI offerings, especially with its DS4000, a powerful 1U 32-port 400GbE data center switch, designed for high-performance AI tasks. In May, it introduced four new networking switches designed to meet the performance and connectivity needs of modern enterprises. The products include secured access switches ES1000, ES1010, ES1050, and secured gateway switch EG1050.
All four switches are designed in a compact 1U form factor, which provides secure and scalable networking solutions with various memory and processor options. They also include redundant, field-replaceable fans and power supplies for improved reliability and can deliver up to 90 Watts of Power Over Ethernet on any port.
Moreover, the company offers various storage solutions, like the SC6100 all-flash storage controller and the SD6200 storage platform, to help companies manage their growing data needs while improving efficiency and reducing operating costs.
In 2024, analysts expect an approximately 50% year-over-year EPS growth for Celestica (NYSE:CLS) and it is currently trading at a forward PE ratio of 14.02x, compared to the 24.37x sector median.
According to our database of over 900 hedge funds, the company stock was held by 38 hedge funds with positions worth $843.930 million in Q2. This brings the company to the 7th spot on our list of cheap small-cap stocks to buy.
6. United Parks & Resorts Inc. (NYSE:PRKS)
PE Ratio (FWD): 11.78
Number of Hedge Fund Holders: 39
United Parks & Resorts Inc. (NYSE:PRKS), formerly known as SeaWorld Entertainment Inc., is a prominent American theme park and entertainment company headquartered in Florida. The company has a portfolio of 13 parks across the United States and Abu Dhabi. It offers a range of attractions, from thrilling rides and coasters to family-friendly experiences and educational wildlife presentations.
It is also one of the largest zoological organizations in the world and helps in the rescue and rehabilitation of sick, injured, or abandoned animals. The SeaWorld rescue team has assisted over 40,000 animals throughout its history.
While United Parks & Resorts (NYSE:PRKS) is a cheap stock compared to its sector median, many analysts also view it in a bullish light. Among the consensus of 12 analysts, the company has an average price target of $62.00, representing an upside of 20.95% from current levels, as of September 27.
On September 4, B.Riley Financial’s analyst Eric Wold reaffirmed a Buy rating on the company stock with a $71 price target. The analyst’s positive outlook is based on several reasons, including a 1.9% increase in lease payments for the San Diego park year-over-year and a notable 22.2% growth compared to four years ago, which shows a strong revenue potential. Despite slight declines in attendance due to bad weather, a recovery in July indicates resilient consumer interest.
Wold is also encouraged by a $500 million share repurchase plan, showing management’s confidence, and he expects increased per capita spending and EBITDA growth as conditions normalize.
Voss Capital, LLC stated the following regarding United Parks & Resorts Inc. (NYSE:PRKS) in its Q2 2024 investor letter:
“New core long: United Parks & Resorts Inc. (NYSE:PRKS): Travel & leisure stocks remain deeply out of favor and, outside of cruise operators, remain well below their pre-covid valuation levels. Headlines such as the WSJ’s recent article titled “Americans Are Skipping Theme Parks This Summer” offer a glimpse of the current lousy sentiment. We think the misleading headlines along with dour vibes surrounding the US consumer are offering up an opportunity in United Parks & Resorts (PRKS), f/k/a SeaWorld, which contrary to headlines had positive year-over-year attendance growth in Q2. As veterans of concentrated small cap equity investing, we feel like we know a good roller coaster when we see one.
The origin of this storied company starts with Adolfus Busch (of Anheuser-Busch fame) and his desire to develop beautiful gardens across the country. For decades these parks, adjacent to his breweries, were used as a marketing tool to build the Anheuser-Busch brand. Over the years, animals and rides were added to the attractions. Busch Gardens Tampa Bay (opened in 1959) and Busch Gardens Williamsburg (opened in 1975) still operate and are among PRKS largest venues. In 1989, Busch Entertainment acquired the theme park division of Harcourt Brace Jovanovich and with it, SeaWorld…” (Click here to read the full text)
Hedge Fund Resource Center