We recently published a list of 10 Oversold Small Cap Stocks to Buy Right Now. In this article, we are going to take a look at where Kosmos Energy Ltd. (NYSE:KOS) stands against other oversold small cap stocks to buy right now.
Market experts believe that the rally in the small-cap stocks might be just getting started.
Data suggested that the benchmark small-cap stock index, Russell 2000, saw an increase of more than 9% between early July and September end. This means that the small-cap index surpassed the S&P 500 index’s return of more than ~4%. The strong performance of the small-cap index primarily stemmed from the rotation into small-cap stocks in July as the investors believed that there would be rate cuts moving forward. These expectations finally materialized when the US Fed announced a mega 50-basis-point drop, with the projections of further cuts. As per Wall Street experts, the small-cap stocks saw a significant increase on the news.
Now that we are in the last quarter of the year, many investors wonder whether or not this rally is sustainable. However, market strategists believe that this rally has the potential to sustain, and 2025 will see strong outperformance.
Small-Caps in 2025: The Road Ahead
Why is a rate-cutting cycle beneficial for small-cap stocks? Smaller companies tend to be dependent more on floating-rate debt as compared to large-cap companies for their funding needs. Therefore, as and when the rates go down, the cost of debt will also be reduced, enabling small-cap companies to borrow more. Therefore, small businesses tend to benefit financially as their interest costs will decline. This should boost the earnings of small-cap companies.
Jill Carey Hall, who is the head of US small and mid-cap strategy at Bank of America, explained that the small-caps tend to outpace the returns delivered by the large-caps by approximately 1 percentage point. This happens over the 6 months post a 50-bps cut.
BlackRock believes that, if the market continues its upward trajectory, the small-cap space can demonstrate dynamism. Small-cap stocks are more sensitive to broader economic cycles, and history suggests that small caps benefit most during the expansionary cycles. The valuations for these firms and an environment of improved EPS growth should result in delivering competitive returns, as per the firm. These favorable characteristics, together with the US economic gains, and the infrastructure investment should help accelerate earnings for the smaller firms.
READ ALSO: 7 Best Stocks to Buy For Long-Term and 8 Cheap Jim Cramer Stocks to Invest In.
What Should Investors Expect from Small Cap Stocks?
As per Francis Gannon, Co-Chief Investment Officer and Managing Director of Royce Investment Partners, small-caps have an advantage over large-caps concerning estimated earnings growth for 2025. Moreover, he believes that small-caps had better returns than large-caps following the previous 10 presidential elections. This was the case irrespective of the fact that which party won the White House. Such an outcome was seen despite every election having its own set of challenges, difficulties, and opportunities. Therefore, he believes that it’s not about the person or policies as much as the investors pay attention to the uncertainty that prevails in the months before any elections.
As per Gannon, inflation has been moderating, the economy continues to grow, unemployment remains low, and there has been normalization in the rates. Also, the benefits of reshoring and the CHIPS Act are now visible. Additionally, he believes that there has been a positive reversion to the mean argument for the small-cap leadership as well as strong performance.
A large computer terminal full of complex calculations tracking the company’s cash flow and investment management decisions.
Our Methodology
To list 10 Oversold Small Cap Stocks to Buy Right Now, we used a Finviz screener to extract the stocks having the market cap of less than $2 billion. After getting the list of 20-25 stocks, we narrowed it down to the following 10 stocks by selecting the ones trading at a forward P/E of less than 15.0x and which have fallen significantly on a YTD basis. Finally, the stocks were ranked in the 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).
A drilling platform in the middle of the ocean, showing the oil and gas exploration process.
Kosmos Energy Ltd. (NYSE:KOS)
Market Cap (As of October 23): $1.92 billion
Forward P/E (As of October 23): 3.98x
% Decline on a YTD Basis: ~41%
Number of Hedge Fund Holders: 25
Kosmos Energy Ltd. (NYSE:KOS) is engaged in the exploration, development, and production of oil and gas along the Atlantic Margins in the US.
Kosmos Energy Ltd. (NYSE:KOS) is focused on generating significant FCF, which it plans to use to reduce debt and invest in future growth in a disciplined capital framework. The company highlighted that its Winterfell project in the Gulf of Mexico is now online and continues to contribute to current production levels. Kosmos Energy Ltd. (NYSE:KOS) has been targeting a modest growth rate while remaining focused on the best projects in its capital framework.
Wall Street analysts opine that Kosmos Energy Ltd. (NYSE:KOS)’s deep portfolio of high-quality opportunities should drive future growth. In the Q2 2024 earnings call, the company highlighted that progress with the GTA project remains on track, with gas production expected to begin soon. Moreover, The Tortue project has been progressing with a clear plan for the first LNG production.
Kosmos Energy Ltd. (NYSE:KOS) highlighted that market conditions for farm downs in the Gulf of Mexico and gas projects, such as Yakaar-Teranga, remain favorable, with healthy interest from potential buyers.
Given the strong macro environment for gas and a positive outlook on its project portfolio, the company is well-placed to continue its trajectory toward increased production and cash flow generation. Benchmark restated a “Buy” rating on the company’s shares, giving a $8.00 price target on 16th October.
Patient Capital Management, a value investing firm, released its third-quarter 2024 investor letter. Here is what the fund said:
“Both Kosmos Energy Ltd. (NYSE:KOS) and Seadrill Limited (SDRL) were top detractors in the quarter as energy prices moved lower. We believe both these names are particularly attractive for idiosyncratic reasons beyond a simple bet on energy prices.
Kosmos Energy (KOS) is an exploration and production services company with assets in Africa. The company is nearing the point where their free cash flow generation will inflect meaningfully higher as new production comes online and CAPEX spend returns to a more normalized maintenance level. We see this as a classic case of time arbitrage where the market is myopically focused on the current year’s high level of investment while ignoring the strong free cash flow generation on the other side. At the current commodity curve, the company will generate its market cap in FCF from 2025-2028. With the combination of gas heavy reserves and inflecting cash flow generation, we think Kosmos is significantly undervalued and a potential acquisition target.”
Overall, KOS ranks 4th on our list of oversold small cap stocks to buy right now. While we acknowledge the potential of KOS as an investment, our conviction lies in the belief that some deeply undervalued AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for a deeply undervalued AI stock that is more promising than KOS but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.