In this article we discuss Billionaire David E. Shaw’s 10 Small-Cap Stock Picks with Huge Upside Potential.
David E. Shaw is one billionaire investor whose record speaks for itself on Wall Street. Having founded D.E. Shaw & Co., L.P. in 1988 with $28 million in capital, the fund has grown to become one of the most successful and biggest, with a 13F portfolio worth $136.27 billion.
Amid the growth, Shaw’s hedge fund D E Shaw has also returned significant returns to shareholders. The fund’s flagship Composite fund has achieved an annualized net return of 12.7% since inception in 2001, as the Oculus Fund has averaged 13.7% annually since 2004 and has never had a negative year.
Shaw’s hedge fund was one of the earliest to leverage complex trading algorithms, followed by some form of human-run investing. Consequently, the multi-strategy fund remains the rage on Wall Street, given its solid returns over the years and the growing trend of returning gains to investors.
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Composite hedge fund gained 18% in 2024, with Oculus outperforming the overall market, soaring 36% and recording its best gain since inception. The better-than-expected returns come on Shaw and the other fund managers deploying systematic and computer-driven trading strategies to identify stocks trading at discounted valuations before they explode. Following the impressive performance in 2024, reports emerged that the hedge fund was planning to return billions of dollars to external clients, as has been the trend.
Amid the impressive performance last year, D.E. Shaw & Co. finds itself at a crossroads as the overall stock market has turned bearish. Major US indices have pulled back by about 6% from record highs amid recession concerns and deteriorating macroeconomics attributed to the US trade war.
The US Federal Reserve holding interest rates unchanged, waiting to see the impact of President Donald Trump’s trade policy, continues to rattle sentiments in the equity market. The Federal Reserve held its benchmark rate unchanged at between 4.25% and 4.5%, much to the anguish of Trump. In its statement, the Fed noted the uncertainty around the economic outlook.
“Uncertainty about the economic outlook has increased further,” the statement said. “The Committee is attentive to the risks to both sides of its dual mandate and judges that the risks of higher unemployment and higher inflation have raised.”
Acknowledging that tariffs could worsen inflation and hinder economic expansion, the statement introduces the likelihood of a stagflation scenario, a phenomenon that has been largely missing from the US economy since the early 1980s. Decision-makers have mostly concurred that the central bank is currently well-placed, as the economy is performing reasonably well at this time, to exercise patience while fine-tuning monetary policy.
Amid the economic uncertainty, focus in the equity markets is slowly shifting towards small-cap stocks with significant upside potential. That’s partly because large-cap stocks are under pressure after skyrocketing to record highs, resulting in valuations above historical norms. Billionaire David E. Shaw’s portfolio boasts of solid small-cap stocks with tremendous upside potential.
David E. Shaw of D.E. Shaw
Our Methodology
We combed D. E. Shaw’s SEC Q4 2024 13F filings to identify Billionaire David E. Shaw’s 10 Small-Cap Stock Picks with Huge Upside Potential. We then settled on stocks with less than $10 billion in market cap and analyzed why the stocks stand out, as solid investments well poised to generate significant long-term value. Finally, we ranked the stocks in ascending order based on the stocks upside potential.
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 373.4% since May 2014, beating its benchmark by 218 percentage points (see more details here).
Billionaire David E. Shaw’s 10 Small-Cap Stock Picks with Huge Upside Potential
10. Five9, Inc. (NASDAQ:FIVN)
D. E. Shaw’s Equity Stake: $536,448
Market Capitalization as of May 9: $2.07 Billion
Stock Upside Potential as of May 9: 30.63%
Number of Hedge Fund Holders: 40
Five9, Inc. (NASDAQ:FIVN) is a software infrastructure company that provides intelligent cloud software for contact centers. It offers a CX platform that delivers a suite of applications, which enables the breadth of customer service, sales, and marketing functions. The stock is down by about 35%. On May 2, UBS cut FIVN price target from $55.00 to $35.00 but kept a Buy rating, citing a more cautious valuation after its mixed earnings report.
The Buy stance stems from Five9, Inc. (NASDAQ:FIVN) delivering impressive first-quarter results, whereby revenue was up 17% year over year to $278.7 million. Five9 also reaffirmed a full-year revenue growth of 10%, affirming underlying growth. The company also bounced back to profitability with a net profit of $11.57 million from a net loss of $12.39 million delivered the same quarter last year.
The better-than-expected results came on Five9, Inc. (NASDAQ:FIVN), emerging as a leading cloud contact software industry player. Its competitive edge stems from its software spanning traditional phone calls, video calls, emails, and social media. Strong demand for the contact software was the catalyst behind the company’s annual revenue rising to record highs of $1 billion. Record results and strong traction in the AI business are one reason Five9 is one of billionaire David E. Shaw’s small-cap stocks with tremendous upside potential.
9. Victoria’s Secret & Co. (NYSE:VSCO)
D. E. Shaw’s Equity Stake: $83.85 Million
Market Capitalization as of May 9: $1.58 Billion
Stock Upside Potential as of May 9: 31.60%
Number of Hedge Fund Holders: 46
Victoria’s Secret & Co. (NYSE:VSCO) is a leading retailer of women’s lingerie and beauty products, operating 880+ stores in the U.S., Canada, and China, plus 500+ global franchise locations. It strengthened its digital presence with the 2022 acquisition of Adore Me, a size-inclusive lingerie brand, and holds a majority stake in a China-focused joint venture with Regina Miracle.
Victoria’s Secret & Co. (NYSE:VSCO) is modernizing its brands—Victoria’s Secret, PINK, and Beauty—through inclusive design, digital strategy, and strategic collaborations. Its Very Sexy collection, swimwear, and sport lines highlight innovation, while PINK targets Gen Z with trend-driven products. Beauty, led by Bombshell, remains strong. Despite challenges, the company is committed to long-term growth with a customer-focused approach.
For Q4 2024, net sales rose 1% to $2.106 billion, with comparable sales up 5%. Net income reached $193 million ($2.33 per share), up from $181 million ($2.29 per share) in Q4 2023. Operating income grew to $268 million from $258 million. Victoria’s Secret & Co. (NYSE:VSCO) has a Hold rating from 11 analysts, with an average price target of $25.32, ranging from $12.00 to $42.00, suggesting a 31.60% potential upside from its current $19.24.