In this piece, we will take a look at the top 12 small-cap stocks with the highest upside potential. If you want to skip our analysis of the benefits and drawbacks of investing in small-cap stocks, then take a look at Top 5 Small-Cap Stocks With Highest Upside Potential.
The stock market is made up of several different sectors and categories each of which is capable of suiting different investing needs and climates. For instance, investors that like to play it safe and generate stable income tend to prefer dividend stocks. For the uninitiated, a dividend is a timed payout that depends on the company and the share. This regular payout can either be reinvested in the company to earn more dividends or spent elsewhere and one of the best known investors in the world, Warren Buffett of Berkshire Hathaway is known for reinvesting his dividends over years to gradually build sizeable investments.
For those who like high growth and rapid returns, technology is often the preferred sector as firms operating in the industry rapidly iterate their products to gain market share and even expand the total addressable market (TAM). Technology has also been the star of the show this year, as stocks have defied investor expectations and posted booming returns that have driven the tech heavy NASDAQ-100 index to record high growth.
Another segment and one that offers lucrative returns if the bets are timed correctly and made on a sound logical basis is the small cap sector. A small cap stock is defined as one whose market value sits between $300 million and $2 billion. Naturally, this often leads it to have a lower share price which opens up the potential to make large returns from small dollar price movements. At the same time, this same principle risks large losses as well since the stock can rapidly fall – and this situation also carries the risk of the market being illiquid with few willing buyers of the shares. Additionally, most small cap companies are high growth firms, which makes them unattractive for dividend investors; yet a crucial advantage for investors seeking portfolio stability is the fact that U.S. small caps are often limited to America when it comes to their market and therefore they remain insulated to global economic developments. This is a crucial consideration these days especially since Europe continues to economically struggle and China’s return to growth has even the most adamant cheerleaders doubting the near term prospects.
One fund that is a fan of small cap investing is Chuck Royce’s Royce Investment Partners. The fund had an investment portfolio worth $9.9 billion by the end of Q1 2023, making it one of the largest of its kind on the planet. Royce Investment operates closed and open end mutual funds and it was set up by Mr. Royce in 1972. It has three closed end funds, out of which the Royce Value Trust is the largest with an average market capitalization of $2.85 billion. Another popular Royce mutual fund is the Royce Pennsylvania Mutual Fund. And, this is a fund that might be worth watching out especially since recent U.S. economic data that saw inflation cool and the economy maintain a growth level might also lead to fresh optimism in industrial firms and their future. We also took a look at some of Mr. Royce’s top investments during Q1 2023 and found out that the top three firms that his firm has piled into are Kennedy-Wilson Holdings, Inc. (NYSE:KW), Ziff Davis, Inc. (NASDAQ:ZD), and Air Lease Corporation (NYSE:AL).
As to trends in the small cap sector right now, Mr. Royce believes that the mania around artificial intelligence stocks is also influencing small caps, with the investor sharing in a July 2023 interview:
I think many investors began to look beyond the current concerns about inflation and recession toward a more stable and positive economic environment. A lot of different factors likely played a role in that mindset: returns in April and May were low for large cap and negative for small cap, which I’m sure encouraged some investors to return to equities. Employment stayed strong, and recession talk appeared to subside in terms of both coverage and volume—which was also encouraging. I suspect that the Fed skipping an interest rate hike in June—even as they all but promised increases in July and September—was an even bigger factor. However, I think the biggest catalyst by far has been the promise of artificial intelligence (“AI”), a major secular trend whose impacts have just started to register.
There was a notable demonstration of both AI’s importance and promise in the first half returns for the small handful of mega-cap companies that currently look like the biggest beneficiaries of AI adoption—Apple, Meta, Alphabet, Microsoft, Amazon, and chip designer, Nvidia. Those companies drove large-cap results. Perhaps the most vivid illustration was Nvidia’s soaring stock price. Thanks to its expertise in making the chips that are needed to power AI applications, the Taiwanese tech giant reached $1 trillion in market cap in late May, putting it in the very exclusive company of Apple, Alphabet, Amazon, and Microsoft—the only other stocks with trillion-dollar market caps. So while we’ve only just begun to see AI’s impact, it’s already having quite an effect on the market.
With these details in mind, let’s take a look at some small cap stocks with the highest upside potential. Out of these, some stand out stocks are ModivCare Inc. (NASDAQ:MODV), Cassava Sciences, Inc. (NASDAQ:SAVA), and Piedmont Lithium Inc. (NASDAQ:PLL).
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Our Methodology
To compile our list small cap stocks with the highest potential, we first made a list of the thirty largest small cap companies with the highest market value and target prices. Then, the percentage upside to the average analyst price target with respect to the current price was calculated, and the twelve small cap stocks with the highest upside were chosen.
Top 12 Small-Cap Stocks With Highest Upside Potential
12. Addus HomeCare Corporation (NASDAQ:ADUS)
Share Price Upside: 22%
Addus HomeCare Corporation (NASDAQ:ADUS) is an American elder and disability care company that provides home care for people who are at risk of hospitalization. It is one of the most highly rated stocks that we’ve come across so far, with 19 out of the 27 analysts covering the shares having rated them as Strong Buy.
As of March 2023, 14 of the 943 hedge funds part of Insider Monkey’s database had bought and owned a stake in Addus HomeCare Corporation (NASDAQ:ADUS). Brian Ashford-Russell and Tim Woolley’s Polar Capital is the firm’s largest hedge fund investor with a stake worth $40.5 million.
Along with Cassava Sciences, Inc. (NASDAQ:SAVA), ModivCare Inc. (NASDAQ:MODV), and Piedmont Lithium Inc. (NASDAQ:PLL), Addus HomeCare Corporation (NASDAQ:ADUS) is a stock with both hedge fund interest and a high analyst share price upside.
11. Gulfport Energy Corporation (NYSE:GPOR)
Share Price Upside: 26%
Gulfport Energy Corporation (NYSE:GPOR) owns hundreds of thousands of net petroleum reserves in Ohio. The firm gained a fan in the form of David Einhorn’s Greenlight Capital in Q1 2023 when the hedge fund grew its stake in Gulfport Energy Corporation (NYSE:GPOR) by 126% to bring it to $22 million. The stock is up a neat 45% year to date as well, but analyst sentiment rates the shares as Buy on average. However, based on the latest share price, there is still a 26% upside penciled in for the time being.
16 of the 943 hedge funds part of Insider Monkey’s Q1 2023 database had owned the firm’s shares. Gulfport Energy Corporation (NYSE:GPOR)’s largest shareholder out of these is Edward A. Mule’s Silver Point Capital through an investment of $688 million.
10. CRA International, Inc. (NASDAQ:CRAI)
Share Price Upside: 29%
Management consulting firm CRA International, Inc. (NASDAQ:CRAI) is a rather interesting stock when it comes to share ratings. This is because all analyst notes covering the shares between May and July have rated them as either Hold or Strong Buy. The price though has a $31 upside.
After sifting through 943 hedge funds for this year’s first quarter, Insider Monkey discovered that 13 had invested in CRA International, Inc. (NASDAQ:CRAI). Jim Simons’ Renaissance Technologies is the largest investor since it has a stake of $31 million.
9. Barrett Business Services, Inc. (NASDAQ:BBSI)
Share Price Upside: 32%
Barrett Business Services, Inc. (NASDAQ:BBSI) is an administration outsourcing company that offers business customers services such as managing payrolls. Naturally, given how hot the labor market has become recently, it’s unsurprising that the firm’s shares are pegged with a strong upside; despite the fact that they are down 2.85% year to date. The losses, however, have been dampened over the past month.
Insider Monkey dug through 943 hedge fund portfolios for the quarter ending in March 2023 and found 14 Barrett Business Services, Inc. (NASDAQ:BBSI) investors. Out of these, Gregg J. Powers’ Private Capital Management has the largest stake through owning $28 million worth of shares.
8. Impinj, Inc. (NASDAQ:PI)
Share Price Upside: 37%
Impinj, Inc. (NASDAQ:PI) provides supermarkets and other establishments with hardware to power self checkout and other services. The average analyst share price target is $92.
By the end of March 2023, 28 of the 943 hedge funds part of Insider Monkey’s database had held a stake in the company. Impinj, Inc. (NASDAQ:PI)’s biggest shareholder is Daniel Patrick Gibson’s Sylebra Capital Management with an investment of $385 million.
7. Establishment Labs Holdings Inc. (NASDAQ:ESTA)
Share Price Upside: 38%
Establishment Labs Holdings Inc. (NASDAQ:ESTA) makes aesthetic augmentation products such as breast implants. Analysts, it appears, are big fans of the shares. There are no Hold or lower ratings shared between May to July, and the average rating is Strong Buy.
18 of the 943 hedge funds surveyed by Insider Monkey had invested in Establishment Labs Holdings Inc. (NASDAQ:ESTA) during Q1 2023. Wilmot B. Harkey and Daniel Mack’s Nantahala Capital Management owns the largest stake which is worth $126 million.
6. Ligand Pharmaceuticals Incorporated (NASDAQ:LGND)
Share Price Upside: 66%
The first biotechnology firm on our list, Ligand Pharmaceuticals Incorporated (NASDAQ:LGND), enters the list with a bang as its shares have an average price target of $112, while the stock currently trades at roughly $68.
Insider Monkey’s first quarter of 2023 research covering 943 hedge funds revealed that 18 had bought the firm’s shares. Ligand Pharmaceuticals Incorporated (NASDAQ:LGND)’s biggest stakeholder is Amy Minella’s Cardinal Capital with a $14 million investment.
ModivCare Inc. (NASDAQ:MODV), Ligand Pharmaceuticals Incorporated (NASDAQ:LGND), Cassava Sciences, Inc. (NASDAQ:SAVA), and Piedmont Lithium Inc. (NASDAQ:PLL) are some top small stocks with high upside.
Click to continue reading and see Top 5 Small-Cap Stocks With Highest Upside Potential.
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Disclosure: None. Top 12 Small-Cap Stocks With Highest Upside Potential is originally published on Insider Monkey.