We recently published a list of 10 Most Promising Small-Cap Stocks According to Hedge Funds. In this article, we are going to take a look at where Silicon Motion Technology Corporation (NASDAQ:SIMO) stands against other most promising small-cap stocks.

Small-Cap Stocks are Expected to Offer Higher Returns in 2025

Small-cap stocks are offering a myriad of opportunities to investors and are expected to go higher. On September 25, Greg Tuorto, Goldman Sachs asset management portfolio manager, appeared in an interview on Yahoo Finance to discuss his thesis on small-cap stocks.

There have been several tailwinds for small-cap stocks, which may have been ignored previously. However, now that the economy is stabilizing, investors may find a variety of undervalued names in the healthcare and technology sectors especially.

Tuorto further added that small-cap stocks have been underperforming for three years, however, in 2024, there is a lot of pent-up opportunity in this area. A year from now, small-cap stocks are expected to deliver unprecedented returns as the economy continues to grow. He expects more IPOs and mergers and acquisitions to come through before 2024 comes to a close.

Nancy Prial, Co-CEO & Senior Portfolio Manager at Essex Investment Management, is also bullish on small caps. We recently covered her views in our article on the 8 Most Undervalued Small-Cap Stocks To Buy According To Analysts. Here’s an excerpt from it:

“Prial noted that small caps have been outperforming in the third quarter, largely driven by expectations of rate cuts, with a 50 basis point reduction being more significant than previously anticipated. She expressed optimism that small caps have substantial room to grow, emphasizing that this could mark the beginning of a multi-year cycle for these stocks. Currently, small-cap stocks are underrepresented in the market, comprising just under 5% of the total equity market, which is at record lows. This low ownership level presents an attractive opportunity for investors.

She pointed out that small-cap stocks remain significantly undervalued compared to their larger counterparts. Prial argued that for small caps to gain traction, several conditions must be met: the continuation of rate cuts, confidence in navigating a soft landing rather than a recession and expanding relative earnings growth. She noted that relative earnings growth for small caps is starting to improve and is expected to surpass that of large caps by the end of the year.”

Biotechs Set to Raise Millions in IPOs

The biotechnology sector is growing rapidly and a large number of startups are expected to go public. On October 7, Reuters reported that three startups are set to raise $400 million in their initial public offerings, amid the sector’s second IPO boom. In September, several drug developers made their market debuts, raising more than $900 million in their IPOs, encouraging other startups to follow suit.

While there is uncertainty around the presidential elections in the United States, biotechnology startups and companies are benefiting from the declining rate cuts. Experts polled by Reuters suggest that biotech companies are of the view that they should exploit the current market momentum rather than wait for presidential elections to normalize the market. However, this also puts immense pressure on other biotech companies to go public as soon as possible.

Our Methodology

To find the most promising small-cap stocks according to hedge funds, we used the Finviz stock screener. We set the market capitalization filter to range between $300 million and $2 billion. We then examined the hedge fund sentiment of these stocks as of Q2 2024 and picked the most popular ones. The stocks are sorted in ascending order of the number of hedge fund holders 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).

Silicon Motion Technology Corporation (NASDAQ:SIMO)

Number of Hedge Fund Holders: 43

Market Capitalization as of October 10, 2024: $2.01 Billion

Silicon Motion Technology Corporation (NASDAQ:SIMO) ranks first on our list of the most promising small-cap stocks to buy according to hedge funds. The American-Taiwanese company is a supplier of NAND flash controllers for solid-state storage devices. Its customers include NAND flash makers, module makers, and hyperscalers. Some of its products include SSD controllers, mobile storage controllers, and expandable storage controllers such as flashcards and USB flash drives.

The company was founded in 1995 and now operates from offices in Hong Kong, Taiwan, and the United States. In the second quarter of 2024, the company generated revenue worth $210.7 million, up by 50% year-over-year. Revenue from SSD controllers grew by 30% year-over-year and increased for the fifth consecutive quarter.

During the year, Silicon Motion Technology Corporation (NASDAQ:SIMO) locked in new programs with flash makers. In addition to that, its new controllers for personal computers and mobile phones can deliver high performance and manage AI workloads.

In the first half of 2024, Silicon Motion Technology Corporation (NASDAQ:SIMO) reported strong financial results. As the company’s share of flash makers continues to increase and its product portfolio continues to expand, the company will report strong financial performance in the second half of 2024 and thereafter.

Ave Maria Growth Fund stated the following regarding Silicon Motion Technology Corporation (NASDAQ:SIMO) in its first quarter 2024 investor letter:

“Silicon Motion Technology Corporation (NASDAQ:SIMO) is a fabless semiconductor company that specializes in low-end flash memory controllers. Memory manufacturers often design their own controllers in-house, but the rising cost of developing a chip is making it increasingly beneficial to outsource the more commoditized low-end controller development to a third party like Silicon Motion. This outsourcing trend is set to move from consumer applications into the server end market, and Silicon Motion’s new enterprise controller is well positioned to capitalize on the growth.”

Overall, SIMO ranks 1st on our list of most promising small-cap stocks according to hedge funds. While we acknowledge the potential of SIMO as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than SIMO 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.