In this article, we will discuss how hedge funds were right about these 10 small-cap stocks.
With the threat of a global recession looming over their heads, investors are having a tough time in 2022. As of August 16, the S&P 500 and Nasdaq composites have slumped 10.24% and 17.24% year-to-date, respectively. According to a recent report by Bloomberg, global economic expansion is predicted to fall to 3.2% in the latter half of 2022, causing central banks to raise interest rates to counter rising inflation. This is expected to seep into 2023 as well, with global output growth set to slow down to 2.9%.
However, there are certain industries which have persevered through these tough economic challenges, the first of them being the energy sector. With a 38.1% increase year-to-date as of August 15, the energy sector has been one of the most lucrative investment opportunities for investors in 2022, with numerous hedge funds making huge investments in the industry. According to PWC, investors who were turned off from energy stocks in the initial months of 2022 have started to reassess their strategies, as buyers gain confidence that high commodity prices shall persist. Despite concerns about the US economic outlook, year-over-year deal activity has remained strong. According to reports, 123 deals valued at $107 billion have taken place in the last 12 months (LTM), up from 98 deals in the previous LTM. Upstream deals constitute the majority of transactions reported in 2022, a trend which is predicted to persist in 2023 as well.
Even though 2022 has been a relatively difficult time for investors, hedge funds are readily stacking up on well-performing, small-cap stocks like SIGA Technologies Inc. (NASDAQ:SIGA), Target Hospitality Corp. (NASDAQ:TH), and Olympic Steel (NASDAQ:ZEUS). In this article, we discuss 10 other small-cap stocks that hedge funds were right about.
Our Methodology
Insider Monkey tracked the data of over 900 hedge funds for the first quarter of 2022. For this article, we picked small-cap stocks that were most popular among these hedge funs and have also gained significant (at least 15%) value year to date.
10. Mirum Pharmaceuticals Inc. (NASDAQ:MIRM)
Market Cap (As of August 17): $884.2M
Number of Hedge Fund Holdings: 19
YTD Gains (As of August 17): 49.21%
Based in California, Mirum Pharmaceuticals Inc. (NASDAQ:MIRM) is an American biopharmaceutical company which focuses on the development and commercialization of therapies and transformative medication to combat cholestatic liver disease.
The company reported its Q2 results on August 4, posting a revenue of $17.5 million, beating analyst consensus of $15.4 million. Furthermore, Mirum Pharmaceuticals Inc. posted an EPS of negative $0.84 in Q2 2022, beating estimates of negative $1.15 by $0.31. Investor interest around the company is at an all-time-high as of Q1 2022, with 19 hedge funds long the stock, compared to 16 in the preceding quarter. Deerfield Management is the largest stakeholder in Mirum Pharmaceuticals Inc. as of Q2 2022, with a total stake value of $63.1 million. Other prominent hedge funds to hold stakes in Mirum include Polar Capital and Citadel Investment Group.
Following excellent Q2 results, Mirum Pharmaceuticals Inc. is in an excellent financial position to accelerate the launch of their drug, Livmarli. The biggest value generator for the company, Livmarli is the only approved life-saving product in a rare pediatric disease market, worth $500 million in the United States alone. Furthermore, indication expansions and global commercial rollouts are additional growth drivers which are anticipated for 2023. There is another long-term growth driver for adult cholestatic liver disease in late-stage development, with three important data readouts predicted in 2023.
On August 18, H.C Wainwright analyst Ed Arce lowered the price target on Mirum Pharmaceuticals Inc. to $63 from $69, to account for dilution from the recent equity raise. The analyst kept a Buy rating on the stock after the pharmaceutical company delivered a strong quarter, which included the sale of the Livmarli drug surprising to the upside. Moreover, Wall Street analysts have unanimously conferred a Strong Buy rating on the stock.
9. MoneyGram International Inc. (NYSE:MGI)
Market Cap (As of August 17): $1.02B
Number of Hedge Fund Holdings: 21
YTD Gains (As of August 17): 34.54%
MoneyGram International Inc. (NYSE:MGI) is an American cross-border P2P payments and money transfer company, based in Dallas, Texas. As of Q2 2022, MoneyGram International Inc. (NYSE:MGI) posted an EPS of $0.09, trailing behind estimates of $0.15 by $0.06. Investor interest in the stock is at a three-year high, with 25 hedge funds long the stock in Q2 2022. As of Q2 2022, Sand Grove Capital Partners is the largest stakeholder in the company, with total stakes valued at $69.7 million. Like SIGA Technologies Inc., Target Hospitality Corp., and Olympic Steel, MoneyGram International Inc. is a small-cap stock that hedge funds have been right about.
On March 22, Northland analyst downgraded the price target on MoneyGram International Inc. (NYSE:MGI) to $11 from $12.25, maintaining a Buy rating on the stock. In the second quarter of 2022, digital revenue reached an all-time high of $92 million, reaching 44% of all money transfer transactions. Moreover, digital transactions increased 36% in 2022, with the adjusted EBITDA decreasing 9% on a reported basis to $50 million due to the strengthening of the dollar against major currencies.
Here is what Carillon Tower Advisers, an investment management firm, has to say about MoneyGram International Inc. in their Q1 2022 investor letter:
“MoneyGram International (NYSE:MGI) is a global leader in cross-border, peer-to-peer payments and money transfers. Shares rose dramatically after it was announced the company would be acquired by a private equity firm for a healthy premium. We have since sold the stock.”
8. Vertex Energy Inc. (NASDAQ:VTNR)
Market Cap (As of August 17): $531.5M
Number of Hedge Fund Holdings: 21
YTD Gains (As of August 17): 44.06%
Based in Houston, Texas, Vertex Energy Inc. (NASDAQ:VTNR) is an American, publicly-traded, energy transition company which specializes in the production and distribution of conventional and alternative fuels. In the second quarter of 2022, Vertex Energy Inc. posted a total revenue of $991.8 million, with analysts predicting growth estimates of 20% per annum over the next five years. In Q2 2022, the company posted an EPS of negative $0.62, trailing behind estimates of $1.24 by $1.86.
In the first quarter of 2022, hedge fund sentiment around Vertex Energy Inc. was at an all time high, with 21 hedge funds having a cumulative stake of $84.9 million. As of Q2 2022, Adam Usdan’s Trellus Management Company is the largest stakeholder in the stock, having a total stake value of $22.4 million. Despite the company’s balance sheets being far from ideal, Vertex Energy’s (NASDAQ:VTNR) recent acquisition of Shell’s Mobile Refinery has granted the company a positive outlook, analysts have ascertained. Ken Griffin’s Citadel Investment Group is another prominent hedge fund to have increased its stake in Vertex Energy Inc. in Q2 2022.
On August 10, H.C. Wainwright analyst Amit Dayal lowered the price target on Vertex Energy Inc. to $15 from $25, maintaining a Buy rating on the stock. The analyst cites weaker-than-expected margin performances due to the company resorting to hedging activities following the refinery takeover.
7. Aerie Pharmaceuticals Inc. (NASDAQ:AERI)
Market Cap (As of August 17): $547.4M
Number of Hedge Fund Holdings: 21
YTD Gains (As of August 17): 48.06%
Based in Durham, North Carolina, Aerie Pharmaceuticals Inc. (NASDAQ:AERI) is an American clinical-stage, publicly-traded pharmaceutical company which focuses on the discovery, development and commercialization of first-in-class therapeutics for the treatment of glaucoma and other eye diseases. Some prominent hedge funds which are long Aerie Pharmaceuticals Inc. include Partner Fund Management and Deerfield Management. Investor interest in Aerie Pharmaceuticals Inc. was at a four-year-high in Q1 2022, with 21 hedge funds having stakes in the company. As of August 17, Aerie Pharmaceuticals Inc. has a market capitalization of $547.4 million, with the company posting an EPS of negative $0.32 in Q2 2022, beating estimates of negative $0.56 by $0.24.
In the second quarter of 2022, Aerie Pharmaceuticals Inc. reported a total revenue of $33.3 million, beating consensus of $32.5 million. According to CEO Raj Kannan, Aerie Pharmaceuticals Inc. delivered a strong performance in Q2 2022, executing the three strategic pillars of growth. The company’s first-in-class glaucoma franchise delivered solid, year-over-year growth, in line with analyst expectations. Furthermore, future prospects for the company also look favorable, as analysts note that management has taken measures to drive operational efficiencies and further reduce their net cash net, while continuing to grow revenue and advance their pipeline. Of the ten Wall Street analysts who have reviewed Aerie Pharmaceuticals Inc. since May, 6 have conferred it with a Strong Buy rating while 2 have given it a rating of Buy.
6. International Money Express Inc. (NASDAQ:IMXI)
Market Cap (As of August 17): $947.3M
Number of Hedge Fund Holdings: 23
YTD Gains (As of August 17): 52.59%
Based in Miami, Florida, International Money Express Inc. (NASDAQ:IMXI) is an American money-transfer company which applies proprietary technology to facilitate users in sending money from the United States and Canada to over 26 countries globally. Reporting a total revenue of $136.9 million in Q2 2022, the company has gained 52.6% year-to-date as of August 17. Investor interest in the stock skyrocketed to an all-time-high in the first quarter of 2022, with 23 hedge funds having stakes worth $148.4 million in International Money Express . Some prominent hedge funds which have increased their stakes in the company in Q2 2022 are Steamboat Capital Partners and Two Sigma Advisors.
International Money Express Inc. has received an overall Buy rating by expert Wall Street analysts. According to experts, the company is experiencing fast growth by placing agents in areas where competitors like MoneyGram (NYSE:MGI) and Western Union (NYSE:WU) do not usually operate. This simple strategy, coupled with its product offerings and low costs, has boosted revenue growth, making International Money Express Inc. very profitable for investors. However, despite a strong business model, the company and its free cash flows remain undervalued, causing investors to capitalize on the entry point. On August 4, Northland analyst Mike Grondahl raised the price target on International Money Express Inc. from $26 to $28, maintaining an Outperform rating on the stock. In his research note, the analyst explained that after a very strong quarter, Intermex’s (NASDAQ:IMXI) momentum from 2021 has seeped into 2022 as well.
Voss Capital mentioned International Money Express Inc. in their Q2 2022 investor letter. This is what they had to say:
“We believe Intermex (International Money Express, IMXI) is a compelling long. IMXI is an international money remittance company that focuses primarily on transactions emanating from the United States and going to Mexico and Guatemala. They make their money by charging a fixed fee for each remittance transaction (85% of revenue), and to a lesser degree from foreign exchange arbitrage on transactions (14%). Their customer base is primarily low-income and under-banked immigrants from Mexico and Guatemala with family/friends remaining in their home country that need financial support. We believe IMXI is a simple story to understand, with a clean capital structure, very low capital intensity (outside of some working capital swings), a strong brand, savvy management, and excellent ongoing execution (e.g., 15-20% growth at high incremental margins). We believe there are flaws in the negative narrative surrounding the company that we can exploit, namely the skepticism around the sustainability of its growth, the stickiness of the customer base, and a misunderstanding about the economics of a digital remittance transaction versus in-person.
The consensus narrative on Wall Street is that IMXI is making a strategic error by not going “all in” on digital transactions, as MoneyGram (MGI), Western Union (WU), and well-backed private competitors like Remitly and Wise are. You will hear that the wave of the VC money shows you what the future beholds, and remittances initiated via physical brick & mortar stores are dying. As the digital transition occurs, Intermex will lose their customer base, and given the operating leverage in the model, profitability will be hit hard. Bears also argue that digital is cheaper, easier, and should create a stickier customer base in the long term. Furthermore, Intermex’s focus on only a few markets makes it hard to scale the business and they will quickly run into a wall on growth.
Voss has a variant view. After much polling of the customer base and study of the cultural drivers, we believe that IMXI’s customer base will be very slow to transition to digital as digital requires a bank account and can take longer for the funds to become available to the recipient in cash. With WU and MGI focusing on digital, IMXI continues to take in-person market share and capture an increasing amount of the superior unit economics that come with it. Digital has a much lower Lifetime Value (LTV)/Customer Acquisition Costs (CAC) ratio due to intense competition requiring high marketing costs and increasing “churn”. Digital also is not necessarily a cheaper way for customer to send money given that the digital players try to juice revenue with greater currency arbitrage to make up for the low advertised transaction fees, something we have found the astute customer base is keenly aware of. We would also argue IMXI’s in-person customer base is likely stickier than the overly digitalfocused Wall Street imagines. A worker stopping by the IMXI counter in the same store they are cashing their check or buying food is part of a routine and that convenience and familiarity is sticky. Management has noted that many of the customers who switched to using IMXI’s digital product last year during lockdowns returned to in-person when stores opened back up.
Intermex’s disciplined focus on a few markets instead of reaching for growth in every country allows it to dominate those highvolume corridors and take share consistently and profitably. In direct contradiction to the bearish sentiment and narrative, IMXI is consistently growing about 20% faster than competitors WU and MGI.
Like SIGA Technologies Inc., Target Hospitality Corp., and Olympic Steel, International Money Express Inc. adds to the list of small-cap stocks that hedge funds have been right about.
5. Cutera Inc. (NASDAQ:CUTR)
Market Cap (As of August 17): $1.00B
Number of Hedge Fund Holdings: 23
YTD Gains (As of August 17): 28.61%
Headquartered in Brisbane, California, Cutera Inc. (NASDAQ:CUTR) is an American medical device company which manufactures aesthetic laser systems. Investor interest in the stock has dipped slightly in the first quarter of 2022, with 23 hedge funds long the stock, compared to 24 hedge funds in the preceding quarter. As of Q2 2022, Israel Englander’s Millennium Management is the leading shareholder in the company. Other prominent hedge funds to increase their stakes in Cutera Inc. in Q2 2022 are Pura Vida Investments and Point72 Asset Management.
In June 2022, Cutera Inc. received FDA clearance for AviClear, the first and only laser-based acne treatment, representing a significant market opportunity for the medical device company. According to experts, Cutera’s (NASDAQ:CUTR) spending on AviClear represents a viable alternative to prescription-strength Isotretinoin “retinoids” class of chemicals, making for a good long-term investment.
In Q2 2022, Cutera Inc. posted an EPS of -$0.24, trailing behind estimates of -$0.15 by $0.09. According to analysts, the company has projected growth estimates of 25% per year for the next five years. On August 5, Piper Sandler analyst Matt O’Brien lowered the price target on Cutera Inc. to $55 from $65, maintaining at Outperform rating on the stock. According to the analyst, the company’s Q2 revenues beat consensus but fell short of the bottom-line due to heightened spending. However, O’Brien notes that with AviClear FDA clearance, and the traditional business continuing to perform well, Cutera Inc. has emerged as a hedge fund favorite in 2022.
4. Chinook Therapeutics Inc. (NASDAQ:KDNY)
Market Cap (As of August 17): $1.37B
Number of Hedge Fund Holdings: 24
YTD Gains (As of August 17): 30.92%
Headquartered in Seattle, Washington, Chinook Therapeutics Inc. (NASDAQ:KDNY) is an American, clinical-stage, biotechnology company which specializes in the development of precision medications for diseases affecting the kidney. Investor interest in Chinook Therapeutics Inc. has taken a slight dip in the first quarter of 2022, with 24 hedge funds having a stake value of $394.1 million, compared to 25 funds having a collective stake of $424.7 million in the preceding quarter. Overall, market sentiment around Chinook Therapeutics Inc. has been high, with the company receiving a Bullish rating on Investors Observer‘s Stock Sentiment Indicator.
Chinook Therapeutics’ (NASDAQ:KDNY) share price hit a 52-week high on August 16 as HC Wainwright raised the price target on the stock to $32 from $28, maintaining a Buy rating on the stock. Chinook Therapeutics traded as high as $21.37 and last traded at $21.21, with a volume of 520 shares, as of August 16. Of the 9 Wall Street analysts who reviewed Chinook Therapeutics Inc. since May, 8 have conferred a Strong Buy rating on the stock. According to analysts, Chinook’s (NASDAQ:KDNY) lead programs Atrasentan and BION-1301 represent compelling assets. Furthermore, Stifel analyst Alex Thompson, who initiated coverage of Chinook Therapeutics Inc. on July 27 with a Buy rating and a $30 price target, wrote in a research note that the company is well capitalized to comfortably get through catalysts in 2023.
3. BELLUS Health Inc. (NASDAQ:BLU)
Market Cap (As of August 17): $1.47B
Number of Hedge Fund Holdings: 24
YTD Gains (As of August 17): 44.81%
BELLUS Health Inc. (NASDAQ:BLU) is a Canadian clinical-stage biotechnology company which focuses on the development of a P2X3 antagonist to address refractory chronic cough and other hypersensitization diseases. As of Q2 2022, the company posted an EPS of -$0.18, trailing behind estimates of -$0.16 by $0.02. BELLUS Health Inc. has a market capitalization of $1.47 billion and has gained 44.81% year-to-date, as of August 17. Moreover, the company posted a revenue of $0.04 million (flat Y/Y) in Q2 2022, beating consensus by $0.04 million.
As of Q1 2022, 24 hedge funds hold a total stake of $367.9 million in the stock, a slight decrease from the preceding quarter, where 27 hedge funds held stakes in the company, an all-time-high for BELLUS Health Inc.. Prominent hedge funds which have increased their hold on the stock in Q2 2022 include RA Capital Management and Citadel Investment Group, the former being the largest shareholder in the stock. Street analysts are unanimously optimistic about BELLUS Health’s (NASDAQ:BLU) prospects, conferring two Buy and six Outperform ratings.
On August 18, H.C Wainwright analyst Andrew Fein raised the price target on BELLUS Health Inc. to $20 from $16, maintaining a Buy rating on the stock. The analyst expressed optimism after the Phase 3 CALM-1 and CALM-2 studies got FDA and EMA approval. He is convinced that approval for the BLU-5937 will soon follow, centering his conviction on the company’s mechanism of action as well as on its smart trial design. Fein added that the combination of a successful ‘End-of-Phase 2’ meeting with the FDA, and scientific advice from the EMA, reinforces his belief.
2. Radius Health Inc. (NASDAQ:RDUS)
Market Cap (As of August 17): $479.8M
Number of Hedge Fund Holdings: 28
YTD Gains (As of August 17): 45.45%
Headquartered in Boston, Massachusetts, Radius Health Inc. (NASDAQ:RDUS) is an American biopharmaceutical company which specializes in the development and production of a new generation of drug therapies for osteoporosis and women’s health. Hedge funds have been stacking up on shares of Radius Health Inc., the latest example being Rubric Capital Management. The hedge fund bought 1.68 million shares worth $16.95 million on August 12, now owning more than 10% of the company. This hefty purchase came right after the company’s out-licensed drug Elacestrant, which is aimed at patients with ER+/HER2- advanced or metastatic breast cancer, received priority review status by the FDA.
On August 15, Gurnet Point Capital and Patient Square Capital announced the completion of their acquisition of Radius Health. In the course of the transaction, shareholders were paid a consideration of $10.00 per share in cash, plus one non-transferable contingent value right per share. As per the terms and conditions of the merger agreement, the purchaser entity for Gurnet Point and Patient Square merged with Radius, and as a result, Radius has become a subsidiary of Gurnet Point and Patient Square. Radius will soon be delisted from the NASDAQ Global Market.
1. Tricida Inc. (NASDAQ:TCDA)
Market Cap (As of August 17): $740.4M
Number of Hedge Fund Holdings: 30
YTD Gains (As of August 17): 50.45%
Based in Southern San Francisco, California, Tricida Inc. (NASDAQ:TCDA) is an American pharmaceutical company which specializes in the development and commercialization of an investigational drug candidate called Veverimer, which is designed to treat metabolic acidosis in patients with chronic kidney disease. In Q2 2022, Tricida Inc. posted an EPS of negative $0.49, beating estimates of negative $0.58 by $0.09.
The company has gained over 50% year-to-date, as of August 17, and as of Q1 2022, investor interest in Tricida Inc. was at an all-time-high, with the 30 hedge funds long the stock. Some of the most prominent hedge funds to invest in Tricida Inc. in Q1 2022 include Point72 Asset Management and Deep Track Capital. Samuel Isaly’s OrbiMed Advisors is the largest stakeholder in the company, having a total stake worth over $84.5 million.
On April 12, Goldman Sachs analyst Madhu Kumar initiated coverage of Tricida Inc. with a Buy rating and a $25 price target. In a research note, the analyst noted that she is optimistic with respect to the outlook for the company’s development of Veverimer, considering the safety and efficacy in three previous placebo-controlled studies which were conducted ahead of the results of a phase 3 study. The data, according to Kumar, seems very promising, and the upcoming results from the studies should be a “key event” for the shares. Moreover, four Wall Street analysts have conferred Tricida Inc. with a consensus Buy rating since May 2022.
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This article is originally published at Insider Monkey.
